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The PMI Group, Inc.
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The PMI Group, Inc.
1996
ANNUAL REPORT
[GRAPHIC APPEARS HERE]
and
PROXY STATEMENT
The PMI Group, Inc. (PMI Group), through its subsidiary, PMI Mortgage Insurance
Co. (PMI), provides private mortgage insurance that insures mortgage lenders
against potential losses in the event of borrower default. By covering default
risk on residential first mortgage loans, mortgage insurance facilitates the
sale of low down payment mortgages in the secondary mortgage market and also
expands homeownership opportunities by enabling people to buy a home with a down
payment of less than 20 percent. PMI is the nation's third largest mortgage
insurer based on 1996 year-end insurance in force.
PMI Group supplements its core mortgage insurance business and enhances its
customer relationships through subsidiaries that license its proprietary
automated underwriting system, offer contract underwriting and provide title
insurance. A leader in mortgage and Electronic Data Interchange technology, PMI
was the first mortgage insurer to commercially introduce an automated
underwriting and mortgage scoring system.
PMI Group is listed on the New York Stock Exchange and Pacific Exchange under
the trading symbol PMA.
TABLE OF CONTENTS
1 Financial Highlights
2 Letter to Shareholders
6 Ahead of the curve.(SM)
9 Invitation to Annual Meeting
of Shareholders
10 Notice of Annual Meeting
of Shareholders
11 Proxy Statement
31 Index to Financials
63 Board of Directors
64 Officers
65 Shareholders' Information
Statements in this document relating to future events are considered forward
looking. Actual results may differ materially from such statements. Our business
depends on risks and uncertainties which are highlighted in our SEC filings.
Financial Highlights
(In thousands) 1996 1995 1994
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Revenues $ 501,424 $ 405,040 $ 359,985
Net income 157,918 135,231 106,132
Total assets 1,509,919 1,304,440 1,097,421
Shareholders' equity 986,862 870,503 687,178
Per Common Share
Net income $ 4.51 $ 3.85 $ 3.03
Dividends .20 .15 --
Book value per share 28.60 24.87 19.63*
Market value
Closing 55 3/8 45 1/4 --
High 60 53 1/2 --
Low 39 7/8 36 --
* Pro forma for 1994.
[BAR CHART APPEARS HERE]
REVENUES NET INCOME EARNINGS
(millions) (millions) PER SHARE
'94 $ 360.0 $ 106.1 $ 3.03
'95 $ 405.0 $ 135.2 $ 3.85
'96 $ 501.4 $ 157.9 $ 4.51
The PMI Group, Inc. [1]
To Our Shareholders
We are very proud to report that PMI Group achieved the key objectives we
established for 1996. We created shareholder value through our operating results
and newly announced stock repurchase program; we realized market share growth
through the relationships we built with our customers; and we helped facilitate
homeownership opportunities through our affordable housing and community
outreach programs. We also introduced a new marketing theme, Ahead of the
curve.(SM), that clearly denotes our ability to anticipate challenges and
develop the product solutions our customers have come to expect from us.
1996 Results
Created Shareholder Value. PMI Group achieved several milestones during the
year, including:
. Record net income of $157.9 million
. Record revenues of over $500 million
. Nearly $1 billion in shareholder equity
. Over 700,000 policies in force
. Inclusion in the S&P MidCap 400
["We created shareholder value through our operating results and newly announced
stock repurchase program."]
Our record results produced earnings per share of $4.51, an increase of 17
percent over 1995, while shareholders earned a total return on their investment
of 23 percent for the year.
One of the steps we took to create shareholder value was the implementation of
our stock repurchase program last year, which is continuing in 1997. The Board
of Directors authorized the repurchase of up to $150 million of PMI Group's
common stock, and we believe this repurchase program represents a sound use of
our capital. To diversify our capital structure and reduce our cost of capital,
we raised $100 million in a public debt offering. We also reduced our commitment
to quota share reinsurance in our mortgage insurance operations by terminating
and commuting our largest reinsurance agreement. These three steps demonstrate
we are committed to the disciplined deployment of capital, and to building
shareholder value.
Shareholder value was also enhanced through the record earnings of our title
insurance subsidiary, American Pioneer Title Insurance Company (APTIC), and by
CMG Mortgage Insurance Company (CMG), our joint venture with CUNA Mutual
Investment Corporation, which achieved profitability in only its second full
year of operation. APTIC's return on equity increased by 21 percent over last
year, while CMG continued to increase its mortgage insurance market penetration
of the credit union industry.
[2] The PMI Group, Inc.
Increased Market Penetration. For PMI Group, a key to our profitable growth is
our core business of mortgage insurance. Last year, we stated that an important
goal was to increase our mortgage insurance market share of new insurance
written. We're proud to report that was accomplished. Our combined market share
for PMI and CMG increased to 14.7 percent, the third highest in the industry.
We improved our market penetration by partnering with our customers and
providing them with value-added products that reduced their cost of doing
business and enhanced their revenue opportunities. Last year, contract
underwriting was a key value-added service we provided to our customers. Sixty
percent of the nation's top lenders utilized our contract underwriting services,
and we underwrote over 86,000 loans.
["Sixty percent of the nation's top lenders utilized our contract underwriting
services."]
Technology products are another key area that exemplify PMI's Ahead of the
curve.(SM) theme. Our automated underwriting and mortgage scoring system,
pmiAURA(SM), is licensed by six of the nation's top twelve mortgage lenders, and
last year these lenders accounted for nearly 20 percent of the mortgage
origination market. The pmiAURA(SM) system's competitive advantage is that it
can be used to evaluate a full spectrum of loan programs for lenders, including
conventional, government and nonconforming loans.
To enhance the value of our automated underwriting system, we introduced the
pmiAURA(SM) Score, a comprehensive mortgage score calculated by the pmiAURA(SM)
system, which predicts mortgage performance for the life of a loan. The
pmiAURA(SM) Score was the first mortgage score to be recognized by four rating
agencies as a way lenders and mortgage securities dealers can reduce the amount
of credit enhancement needed on certain mortgage-backed securities.
["The pmiAURA(SM) Score was the first mortgage score to be recognized by four
rating agencies . . ."]
The improved mortgage insurance market share we experienced last year has
recently come under pressure due at least in part to competing products that we
chose not to offer. We feel very strongly that obtaining acceptable projected
returns on our products is one of the keys to generating long-term
profitability.
Facilitated Homeownership Opportunities. PMI is committed to reaching out to new
borrower segments by facilitating homeownership opportunities to underserved
markets while maintaining its high quality book of business. We believe that
The PMI Group, Inc. [3]
implemented effectively, our affordable housing and community outreach programs
will continue to generate profitable returns. PMI's risk-sharing alliance with
Neighborhood Housing Services of America, Inc. (NHSA) is just one example of our
partnership effort to expand homeownership opportunities in underserved
communities across the nation.
PMI is also committed to working with the nation's state housing agencies to
expand homeownership opportunities for low- and moderate-income families. Last
year, PMI worked closely with state agencies in Rhode Island, New York, New
Hampshire and Massachusetts to craft innovative risk-sharing alliances that made
homeownership affordable to hundreds of hard-working families. We also continued
our national and local commitment to Habitat for Humanity. PMI's support for
Habitat underscores the strength of our personal and corporate commitment to
expand homeownership opportunities, and work hand-in-hand with low-income
families who have the desire and ability to own homes.
Looking Ahead
We feel there are several market drivers that will help fuel the future growth
of the mortgage insurance industry. The nation has realized recent increases in
the homeownership rate and these improving trends are supported by the Clinton
Administration's goal to increase the homeownership rate to 67.5 percent by the
year 2000. We believe much of the future homeownership growth will be fueled by
the immigrant population growth and the pent-up demand of people in the 35-and-
over age group looking at alternatives to renting. With these market drivers and
other favorable demographic trends, we anticipate the low down payment sector
will continue to be the fastest growing segment of the mortgage origination
market.
["To increase our market position . . . we must develop new strategic pricing
options as well as provide standard mortgage insurance and value-added
products."]
To prepare for these growth opportunities, we created a five-year plan for PMI
Group through the year 2000. Our objective is to maximize shareholder value by
focusing on growing our core business of mortgage insurance and increasing the
utilization of capital.
Generate Quality Growth. The current priorities in our strategic plan are
centered on two issues. First, the nation's top lenders continue to consolidate
and, therefore, control a growing percentage of the mortgage origination market.
To increase our
[4] The PMI Group, Inc.
market position with the nation's top lenders, we must develop new strategic
pricing options as well as provide standard mortgage insurance and value-added
products. In addition, we must remain focused on continuing to deliver a full
battery of proven, value-added products to our other customer segments. By
offering a complete package of mortgage insurance pricing options, value-added
products and technology solutions, we anticipate quality growth in all of our
customer segments.
Sound Capital Management. Our second priority is a strategy of deploying capital
only when the expected returns are accretive to earnings. As shareholders, it is
important for you to know that we are committed to long-term profitability and,
thus, we will not pursue short-term growth at the cost of sacrificing future
returns on capital. We will seek only those growth or investment opportunities
that demonstrate attractive returns on capital. Further, our stock repurchase
program has been structured as an effective means of returning excess capital to
shareholders.
During the first quarter of 1997, we announced the sale of $100 million in new
"Capital Securities." This capital was raised to further diversify our capital
base and lower our overall cost of capital. To create further value for our
shareholders, the proceeds of this sale may be used for additional repurchases
of our common stock, financing possible joint ventures or funding investments in
subsidiaries of PMI Group.
We remain committed to position PMI Group for future growth in our core business
by delivering Ahead of the curve.(SM) solutions to our customers to save time
and sharpen their competitive edge. Our future growth will also be maximized
with a more focused strategy of capital utilization, including our stock
repurchase program, and continual gains in loss mitigation and operating
efficiency. We appreciate your support of our efforts, and we look forward to
creating additional value for our shareholders in 1997.
/s/ Edward M. Liddy /s/ W. Roger Haughton
Edward M. Liddy W. Roger Haughton
Chairman of the President and
Board of Directors Chief Executive Officer
The PMI Group, Inc. [5]
Ahead of the curve.(SM)
PMI's Ahead of the curve.(SM) theme embodies PMI's long-standing qualities . . .
innovative, creative, and resourceful. Since PMI first began operations back in
1973, it has continually sought to develop tangible and effective products that
prove to enhance both the bottomline of its customers and its drive to
underwrite quality business. Over the years, PMI has led the mortgage insurance
industry in introducing a number of innovative products and services to its
customers; here are some of those PMI FIRSTS.
Mortgage Industry Challenges in the 1970's
. Mortgage lending dominated by Savings and Loan industry
. Record breaking growth in the housing market
. Decade marked by inflationary real estate prices and swings in financial
cycles
PMI Firsts
Regional Offices. PMI was the first mortgage insurer to improve customer service
and risk control by establishing regional offices for underwriting and secondary
marketing. This met lenders' needs for addressing their individual issues during
rapidly changing times. Today, PMI has nineteen offices nationwide, providing
local customized service, and is licensed in all fifty states as well as the
District of Columbia.
Market Analysis. PMI was the first to provide national and local market
information to lenders and real estate agents. Today, through PMI's
comprehensive Economic Real Estate Trends report, the mortgage finance industry
is kept up-to-date on the economic performance and trends for the top one
hundred metropolitan statistical areas (MSAs). This report is available on
diskette.
Lender and Realtor(R) Education. PMI was the first mortgage insurer to conduct
regular regional seminars for lenders' personnel, builder associations and real
estate boards to keep them current on the ever-changing trends and techniques in
mortgage financing. Today, PMI continues to actively conduct seminars for
lenders and real estate agents. Some major topics include sales and customer
service skills, identifying fraud, underwriting self-employed borrowers, and
appraisal techniques.
[6] The PMI Group, Inc.
Mortgage Industry Challenges in the 1980's
. Savings and Loan industry deregulated
. Competition intensified for mortgage loans
. Lending practices became more aggressive
. Deteriorating real estate and economic conditions led to losses in "oil patch"
states
PMI Firsts
Automated Underwriting System. PMI revolutionalized the mortgage insurance
industry by developing and employing the first automated underwriting system,
pmiAURA(SM), to predict the relative likelihood of loan default over the life of
the loan. It combines a risk-based, computerized-statistical model with a
seasoned database that draws on the experience of more than 1.5 million loans.
This system decreases PMI's response time to customers, increases productivity,
improves underwriting consistency, and strengthens risk-management capabilities.
New Pricing Structure. Due to losses realized in the "oil patch" states in the
mid-1980s, PMI was the first to implement premium rate increases and a
territorial pricing structure that accounted for the risks associated with each
regional area. After years of experience, PMI has perfected a national pricing
strategy that offsets the different loss experiences across the nation to
generate consistent profitable returns. PMI was also the first mortgage insurer
to reward lenders with discounts for the quality of their business.
Precalculated Coverage. PMI was the first mortgage insurer to create a single
premium product, Super Single, that automatically extends coverage until the
mortgage amortizes down to 80 percent. This product eliminates the need to
determine how many years of coverage should be purchased and thus, cancellation
of mortgage insurance is not an issue.
Incontestability Endorsement. PMI was the first mortgage insurer to provide an
incontestability endorsement to mortgage lenders. With this endorsement, PMI
will not rescind coverage, despite third-party misrepresentations, provided the
borrower has made at least 12 regularly scheduled payments. This product was
especially important for lenders who originated loans through the expanding
mortgage broker segment and, thus, created a marketing advantage for PMI without
materially increasing risk.
The PMI Group, Inc. [7]
Mortgage Industry Challenges in the 1990's
. Lender consolidation, increased competition and decreased profit margins
. Need to improve efficiencies and customer service
. Pressure to profitably fund loans for low-to moderate-income borrowers
PMI Firsts
Licensed Automated Underwriting System. PMI was the first mortgage insurer to
commercially license an automated underwriting system. The system is available
for both Windows(TM) (DecisionWise(TM)) and DOS (pmiAURA(SM)) platforms.
Customers using pmiAURA(SM) or DecisionWise(TM) for either their government or
conventional loans enjoy many benefits: closing loans quickly (now in days
instead of months); increasing productivity (as much as 35 percent); increasing
underwriting consistency; and reducing the risk of human error. It was also the
first automated underwriting system to be licensed by a national non-profit
housing organization (i.e. Neighborhood Housing Services of America, Inc.) to
underwrite affordable housing loans.
Licensed Lead Generation Product. PMI has increased customers' business with the
industry's first fully-automated lead generation system, pmiMORTGAGE-
CONNECTION(SM), using a toll-free number to prequalify prospective borrowers.
Over 130 customers now license the system which has generated nearly 40,000
leads for mortgage lenders since its launch.
Windows(TM)-based Access to PMI Database. PMI was the first mortgage insurer to
allow customers Windows(TM)-based access to loan servicing data. Over 65,000
requests were processed through pmiPC-CONNECT(SM) in its first full year of
implementation. This significant increase in efficiency for both PMI and its
customers will continue to grow as more lenders are connected to the system.
Paperless Transaction. PMI was the first mortgage insurer to receive an
application for insurance electronically through an Electronic Data Interchange
(EDI) link with a lender. These EDI links, through pmiPAPERLESS(SM), reduce the
paperwork for both PMI and its customers, streamline the mortgage insurance
application process, reduce the number of errors associated with re-entering
information, and increase the speed with which PMI is able to underwrite its
business. PMI was also the first mortgage insurer to receive an application over
the Internet.
Future
The future will provide PMI with new opportunities to demonstrate our ability to
create innovative, Ahead of the curve.(SM) solutions for its customers. Whether
it's helping customers' find new ways to increase their revenues or improve
their efficiency, PMI's goal is to become an integral partner in their business,
and by doing so, profitably grow its core mortgage insurance business and create
shareholder value.
[8] The PMI Group, Inc.
INVITATION TO ANNUAL MEETING
OF SHAREHOLDERS
April 15, 1997
Dear Shareholder,
You are cordially invited to attend the 1997 Annual Meeting of Shareholders of
The PMI Group, Inc. to be held on Tuesday, May 13, 1997, at 9:00 a.m., Pacific
Time. The meeting will be held on the 17th floor at the Company's headquarters
located at 601 Montgomery Street, San Francisco, California.
We look forward to greeting as many of our shareholders as are able to be with
us. As explained in the accompanying Notice of Annual Meeting of Shareholders
and Proxy Statement, the purposes of the meeting are the election of Directors
and ratification of the appointment of independent auditors for 1997. Your
Board of Directors unanimously recommends that you vote FOR the nominees for
Director identified in the proxy statement and FOR ratification of the
appointment of the independent auditors. At the meeting, we will report on the
state of our business, and there will be an opportunity for you to ask
questions.
WHETHER OR NOT YOU EXPECT TO ATTEND, TO ENSURE YOUR REPRESENTATION AT THE
MEETING AND THE PRESENCE OF A QUORUM, PLEASE COMPLETE, DATE, SIGN AND MAIL THE
ENCLOSED PROXY PROMPTLY.
/s/ E. M. Liddy /s/ W. Roger Haughton
Edward M. Liddy W. Roger Haughton
Chairman of the President and
Board of Directors Chief Executive Officer
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 9
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of The PMI
Group, Inc. ("TPG"), a Delaware corporation, will be held on Tuesday, May 13,
1997, at 9:00 a.m., Pacific Time, at 601 Montgomery Street, 17th Floor, San
Francisco, California, for the following purposes:
1. To elect nine Directors
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for 1997
3. To transact such other business as may properly come before the
meeting
The foregoing items of business are more fully described in the Proxy Statement
accompanying this Notice.
Only shareholders of record at the close of business on March 31, 1997 ("Record
Date") are entitled to notice of and to vote at the meeting and any adjournment
thereof.
By Order of the Board of Directors
/s/ Victor J. Bacigalupi
Victor J. Bacigalupi
Senior Vice President
General Counsel and Secretary
April 15, 1997
YOUR VOTE IS IMPORTANT
PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD
PAGE 10 THE PMI GROUP, INC. AND SUBSIDIARIES
PROXY STATEMENT
This Proxy Statement and the accompanying proxy are being mailed on or about
April 15, 1997, in connection with the solicitation of proxies on behalf of the
Board of Directors of The PMI Group, Inc. ("TPG"), a Delaware corporation, for
use at the Annual Meeting of Shareholders to be held at 9:00 a.m., Pacific Time,
May 13, 1997, at 601 Montgomery Street, 17th Floor, San Francisco, California.
TPG's principal executive office is located at 601 Montgomery Street, San
Francisco, California 94111. The telephone number at that address is (415) 788-
7878.
RECORD DATE AND SHARES OUTSTANDING. The Record Date for determining shareholders
entitled to vote at the meeting is March 31, 1997. As of that date,
approximately 33,948,300 shares of common stock were outstanding and entitled
to be voted at the meeting.
REVOCABILITY OF PROXIES. Proxies are revocable by written notice to the
Secretary of TPG at any time prior to their exercise and may also be revoked by
signing and delivering a proxy with a later date or by attending the meeting and
voting in person.
VOTING AND SOLICITATION. For each matter that may come before the meeting, every
shareholder will be entitled to one vote for each share of common stock
registered in the shareholder's name on the Record Date. The enclosed proxy is
solicited by the Board of Directors of TPG. If the proxy is properly executed
and returned, and choices are specified, the shares represented thereby will be
voted at the meeting in accordance with those instructions. If no choices are
specified, a properly executed proxy will be voted as follows:
FOR -- election to the Board of the nine individuals nominated by the Board of
Directors; and
FOR -- ratification of the appointment of Deloitte & Touche LLP as independent
auditors for 1997.
Votes cast by proxy or in person at the meeting will be counted by the persons
appointed by TPG to act as election inspectors for the meeting. The election
inspectors will treat shares represented by proxies that reflect abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. Abstentions will be counted in the number of votes cast,
but do not constitute a vote "for" or "against" any matter. Abstentions,
therefore, will be disregarded in the calculation of a plurality for election of
Directors and will have the same legal effect as a vote against other matters.
A "broker non-vote" occurs when a broker (or other nominee) does not have
authority to vote on a particular matter without instructions and has not
received such instructions. The election inspectors will treat broker non-vote
shares as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. However, for purposes of determining the
outcome of any matter as to which the broker has indicated on the proxy that it
does not have discretionary authority to vote, broker non-vote shares will be
disregarded in the calculation of a plurality or of votes cast.
The cost of this solicitation will be borne by TPG. TPG has retained
ChaseMellon Shareholder Services to assist in the solicitation of proxies at an
estimated fee of $4,000 plus reimbursement of reasonable expenses. In addition,
TPG may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation material to such
beneficial owners. Proxies also may be solicited by certain of TPG's Directors,
officers and employees, without additional compensation, personally or by
telephone or telegram.
TPG's Annual Report to Shareholders for the fiscal year ended December 31, 1996,
has been mailed with this document to shareholders. Shareholders should refer
to that Annual Report for financial and other information about the activities
of TPG. However, the Annual Report to Shareholders is not incorporated by
reference into this Proxy Statement and is not to be deemed a part of this Proxy
Statement.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 11
PROXY STATEMENT
ITEM 1: ELECTION OF DIRECTORS
NOMINEES FOR ELECTION. A board of nine Directors is to be elected at the
meeting. Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the nine nominees named below. All of the nominees, except
for James C. Castle and John D. Roach, are presently Directors of TPG. Each
person elected shall serve a one-year term as a Director until the next Annual
Meeting or until a successor is duly elected and qualified or until his or her
earlier death, resignation or removal.
JAMES C. CASTLE
DONALD C. CLARK
W. ROGER HAUGHTON
WAYNE E. HEDIEN
EDWARD M. LIDDY
JOHN D. ROACH
KENNETH T. ROSEN
RICHARD L. THOMAS
MARY LEE WIDENER
Each nominee has consented to being named in this Proxy Statement and has
indicated a willingness to serve if elected. However, if at the Annual Meeting
any of the nominees named above is not available to serve as a Director (an
event that the Board of Directors does not anticipate), the proxies will be
voted for the election as Directors for such other person or persons as the
Board of Directors may designate, unless the Board of Directors, in its
discretion, reduces the number of Directors.
SHAREHOLDER VOTE REQUIRED. Directors shall be elected by a plurality of the
votes cast at the meeting. Only votes cast for a nominee will be counted.
Votes cast include votes under proxies that are signed, but that do not have
contrary voting instructions. Broker non-votes, abstentions and instructions on
the accompanying proxy card to withhold authority to vote for one or more of the
nominees will be disregarded in the calculation of a plurality of the votes
cast.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE NOMINEES
---
NAMED ABOVE, AND UNLESS A SHAREHOLDER GIVES INSTRUCTIONS ON THE PROXY CARD TO
THE CONTRARY, THE PROXY WILL BE VOTED FOR THE NOMINEES.
PAGE 12 THE PMI GROUP, INC. AND SUBSIDIARIES
NOMINEES FOR DIRECTOR OF TPG
Set forth below for each nominee is certain information, including age as of
April 1, 1997, principal occupation, business experience for at least the past
five years, the first year elected a Director of TPG, and the Committees of the
Board of Directors on which each Director serves.
JAMES C. CASTLE, 60, has been nominated to serve as a Director of TPG. He is
currently Chairman and Chief Executive Officer of USCS International, Inc., a
leading provider of customer management software and statement presentment
services to the global communications industry, positions he has held since
joining the company in August 1992. Prior to joining USCS International Inc.,
Dr. Castle served as Chief Executive Officer and Director of Teradata
Corporation from August 1991 through April 1992. Dr. Castle is also on the
boards of directors of PAR Technology Corp., ADC Telecommunications, Inc. and
Leasing Solutions, Inc.
DONALD C. CLARK, 65, has been a Director of TPG since May 1996. Mr. Clark
joined Household International, Inc., a major consumer financial services
company, in 1955. He has held a number of managerial and executive positions
with that company, including Secretary and Treasurer. He was elected to the
board of directors of Household International, Inc., in 1974, President in 1977,
Chief Executive Officer in 1982 and Chairman of the Board in 1984. In 1994, he
relinquished the title of Chief Executive and in 1996 he relinquished the title
of Chairman and retired. He is also on the boards of directors of Armstrong
World Industries, Inc., Warner-Lambert Company, Ameritech and Scotsman
Industries, Inc., and is a trustee of Clarkson University and Northwestern
University. He is a member of the Compensation and Nominating Committee.
W. ROGER HAUGHTON, 49, has been President and Chief Executive Officer of PMI
Mortgage Insurance Co. ("PMI"), TPG's principal subsidiary, since January 1993
and was elected to the same positions with TPG in January 1995. Haughton came to
PMI in 1985 as Vice President of Underwriting, after 16 years with Allstate
Insurance Company ("Allstate"). In 1987, he was promoted to Vice
President/General Manager for PMI's Central Zone, responsible for all sales and
field office operations in that region. In 1989, he became Group Vice President
of Insurance Operations, Claims and Actuarial Services departments. Effective
March 1997, Mr. Haughton is scheduled to commence a two-year term as President
of the Mortgage Insurance Companies of America ("MICA"), the industry trade
association. He is presently serving on the Fannie Mae National Advisory Council
for a two-year term. He also has a long history of active volunteerism with
various affordable housing organizations, including Habitat for Humanity, and
serves on the board of Social Impact. Mr. Haughton has been a Director of TPG
since January 1995 and a Director of PMI since May 1990.
WAYNE E. HEDIEN, 63, has been a Director of TPG since January 1995 and was a
Director of PMI between February 1983 and May 1990 and between April 1992 and
January 1995. Mr. Hedien was the Chairman of the Board of Allstate from July
1989 through December 1994 and was elected to the same positions with The
Allstate Corporation in March 1993 in preparation for The Allstate Corporation's
initial public offering. He held a variety of senior executive positions with
Allstate and its affiliates prior to his retirement from Allstate in December
1994. He is a member of the Audit Committee and the Compensation and Nominating
Committee.
EDWARD M. LIDDY, 51, is Chairman of the Board of TPG and was Chairman of the
Board of PMI between October 1994 and January 1995. He has been a Director of
TPG since January 1995. He is currently the President and Chief Operating
Officer of The Allstate Corporation and holds the same positions with Allstate.
Prior to joining The Allstate Corporation in August 1994, Mr. Liddy held a
variety of senior executive positions with Sears, Roebuck and Co., including
Senior Vice President and Chief Financial Officer. Mr. Liddy is also a member
of the board of directors of the Kroger Company, one of the largest grocery
retailers in the United States.
JOHN D. ROACH, 53, has been nominated to serve as a Director of TPG. He is
currently Chairman, President and Chief Executive Officer of Fibreboard
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 13
PROXY STATEMENT
Corporation, elected positions he has held since joining the company in July
1991. Prior to joining Fibreboard Corporation, Mr. Roach was Executive Vice
President of Manville Corporation, a manufacturer of building products,
paperboard packaging, fiberglass and industrial minerals. He also served as
President of its Mining and Mineral Group and President of Celite Corporation, a
wholly owned Manville subsidiary. In addition, Mr. Roach served as President of
Manville Sales Corporation, now known as Schuller International, and the
Fiberglass and Specialty Products Groups from 1988 to 1989. Mr. Roach first
joined Manville Corporation in 1987, serving as Senior Vice President and Chief
Financial Officer from 1987 to 1988. Prior to joining Manville, Mr. Roach was a
strategy consultant and Vice Chairman of Braxton Associates; Vice President and
Managing Director of the Strategic Management Practice for Booz, Allen,
Hamilton; and Vice President and Director of the Boston Consulting Group. Mr.
Roach is also on the boards of directors of Morrison Knudsen Corporation and
Thompson PBE, Inc.
KENNETH T. ROSEN, 48, has been a Director of TPG since January 1995 and was a
Director of PMI between October 1993 and January 1995. Dr. Rosen has been a
professor of business administration at the Haas School of Business since July
1978, and Chairman of the Fisher Center for Real Estate and Urban Economics
since 1979, each at the University of California at Berkeley. He is also
President of the Rosen Consulting Group, a real estate and mortgage market
consulting firm. Dr. Rosen serves as the Chief Executive Officer of ERE Rosen
Real Estate Securities. Dr. Rosen is on the board of directors of Golden West
Financial Corporation and Avatar Company. He is Chairman of the Compensation and
Nominating Committee and a member of the Audit Committee.
RICHARD L. THOMAS, 66, was elected as a Director of TPG on July 25, 1996. Mr.
Thomas is the retired Chairman of First Chicago NBD Corporation and its
principal subsidiary, The First National Bank of Chicago. From January 1, 1992
until December 1, 1995, he was Chairman and CEO of First Chicago Corporation,
after which he served as Chairman of First Chicago NBD Corporation until May 10,
1996. He is also a Director of CNA Financial Corporation, First Chicago NBD
Corporation, IMC Global, Inc., The Sabre Group Holdings, Inc. and Sara Lee
Corporation. He is a member of the Audit Committee.
MARY LEE WIDENER, 58, has been a Director of TPG since January 1995 and was a
Director of PMI between October 1993 and January 1995. Ms. Widener has been
Chief Executive Officer of Neighborhood Housing Services of America, Inc. since
May 1974, and also holds the title of President. Ms. Widener is also
Chairperson of the board of directors of the Federal Home Loan Bank of San
Francisco. She is Chairperson of the Audit Committee and a member of the
Compensation and Nominating Committee.
There are no family relationships among any of the aforementioned persons.
Pursuant to an agreement among TPG, PMI, The Allstate Corporation and Allstate,
for so long as The Allstate Corporation and its affiliates own at least 30
percent of TPG's common stock, The Allstate Corporation has the right to
designate for nomination to TPG's Board of Directors two members of The Allstate
Corporation's management. TPG and The Allstate Corporation have agreed to
cooperate to cause their respective nominees to be elected to TPG's Board of
Directors. To date such right has not been exercised by The Allstate
Corporation. See "Transactions with Allstate," below.
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS. TPG's Board of Directors
held six meetings during 1996. Each Director attended at least 75% of the Board
meetings and meetings of committees of which he or she is a member. The Board
of Directors has established an Audit Committee and a Compensation and
Nominating Committee. The members and chairperson of each committee are
determined from time to time by the Board.
The Audit Committee consists of Ms. Widener, Chairperson, Mr. Hedien, Dr. Rosen
and Mr. Thomas. The committee held three meetings in 1996. The committee
selects a firm of independent certified public accountants to audit the books
and accounts of TPG and its subsidiaries for the fiscal
PAGE 14 THE PMI GROUP, INC. AND SUBSIDIARIES
year for which they are appointed. In addition, the committee reviews and
approves the scope and costs of all services (including nonaudit services)
provided by the firm selected to conduct the audit. The committee also monitors
the effectiveness of the external and internal audit effort and financial
reporting, and inquires into the adequacy of financial and operating controls
for TPG and its subsidiaries. The committee coordinates with TPG's Compliance
Officer, with respect to statutory and other business ethics matters, and
receives periodic reports regarding such matters from the Compliance Officer.
The Compensation and Nominating Committee consists of Dr. Rosen, Chairman, Mr.
Clark, Mr. Hedien and Ms. Widener. The committee held five meetings in 1996.
The committee makes recommendations to the Board with respect to the
administration of the salaries, bonuses and other compensation to be paid to the
officers and other employees of PMI and TPG and acts as administrator for the
Equity Incentive Plan. The committee also advises the Board with respect to the
size and composition of the Board and recommends prospective Directors to assist
in creating a balance of knowledge, experience and capability on the Board. The
committee also reviews the management organization of TPG.
DIRECTORS' COMPENSATION AND BENEFITS. Directors who are employees of TPG or its
subsidiaries do not receive additional compensation for their services as
Directors. Each Director who is not an employee of TPG or any of its
subsidiaries ("Non-Employee Director") receives fees for his or her service as a
Director. Each such Non-Employee Director receives an annual retainer of
$22,000. Committee Chairs receive an additional annual retainer of $2,000.
Directors are reimbursed for reasonable expenses to attend meetings.
Under the Directors' Deferred Compensation Plan, each Non-Employee Director may
defer receipt of his or her retainer fees. The minimum permitted deferral is
$5,000. All amounts deferred are deemed to be invested in phantom shares of
TPG's common stock. On any date, the value of each share of phantom stock will
equal the fair market value of a share of common stock, including reinvestment
of any dividends. At the time when a Director makes a deferral election, he or
she also must elect the time and method for payment of the deferred amounts.
Phantom shares will be paid in cash.
Under TPG's Stock Plan for Non-Employee Directors (the "Directors Plan"), each
Non-Employee Director is awarded annually up to 300 shares of common stock. In
the initial year as a Director, the shares are prorated (based on months of
service between June 1 and May 31) and are awarded as soon as administratively
practicable after the Director joins the Board. Thereafter, shares are awarded
as of the first business day in June of each year (assuming that he or she
remains an eligible Non-Employee Director). Each Non-Employee Director may
receive only one award of common stock during any calendar year. The number of
shares awarded to any Non-Employee Director will be reduced as necessary so that
the fair market value of the shares on the date of award does not exceed
$30,000. The Directors Plan also provides for an annual cash payment to each
Non-Employee Director in an amount equal to the estimated tax liability from the
award of the shares.
The Directors Plan also annually grants each Non-Employee Director an option to
purchase up to 1,500 shares of common stock (up to 3,000 shares for the initial
year as a Director). In the initial year as a Director, the annual option grant
is prorated (based on months of service between June 1 and May 31) and is
granted as soon as administratively practicable after the Director joins the
Board. Thereafter, options are granted as of the first business day in June of
each year (assuming that he or she remains an eligible Non-Employee Director).
The exercise price of each such option is 100 percent of the fair market value
on the date of grant of the shares covered by the option. Each such option
becomes exercisable in three equal installments, commencing on the first
anniversary of the grant date (assuming the Non-Employee Director remains on the
Board on such anniversary date, otherwise any unexercisable portion of the
option will be forfeited). All options granted to Non-Employee Directors have a
term of no greater than 10 years from the date of grant. If a Director
terminates service on the Board prior to an option's normal expiration date, the
period of exercisability of the option will be shorter, depending upon the
reason for the termination.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 15
PROXY STATEMENT
In order to more closely align the interest of Non-Employee Directors with those
of TPG's shareholders, the Board has adopted a policy regarding common stock
ownership by Non-Employee Directors. Each Non-Employee Director is expected to
own by the fifth anniversary of serving on the Board, the equivalent number of
shares of TPG's Common Stock representing five times the annual retainer fee.
The following table sets forth the fees and other compensation benefits paid to
all Non-Employee Directors.
NON-EMPLOYEE DIRECTORS' COMPENSATION AND BENEFITS
================================================================================
ANNUAL INITIAL GRANT ANNUAL GRANT ANNUAL GRANT
RETAINER OF TPG OF TPG OF TPG
FEES/1/ STOCK OPTIONS/2/ STOCK OPTIONS/3/ COMMON SHARES/4/
- ------------------------------------------------------------------------------------------------------------------
Board Members $22,000 3,000 shares 1,500 shares 300 shares
Committee Chairman,
Audit and Compensation
and Nominating Committees $ 2,000 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Note: Grants will be made under the Directors Plan.
/1/ Under the Directors' Deferred Compensation Plan, each Non-Employee Director
may elect to defer up to 100% of the fees and other cash compensation that
he or she may receive from TPG in the form of cash for service as a
Director (but in no case may a Director defer less than $5,000 for the year
in question.) The deferred amount will be deemed to be invested in phantom
shares of TPG common stock. Amounts deferred are payable at the Director's
option on a fixed future date or upon retirement from the Board. Payment of
amounts deferred will be made either in lump sum or in equal installments
spread over three, five or ten years.
/2/ Granted only in the initial year of joining the Board. The stock option
vests in three equal installments on the first, second and third
anniversaries of the grant. The exercise price is equal to the fair market
value on the date of the grant.
/3/ Granted after the initial year of joining the Board for each subsequent
full year of service. The stock option vests in three equal installments on
the first, second and third anniversaries of the grant. The exercise price
is equal to the fair market value on the date of the grant.
/4/ Granted for each full year of service, prorated for service of less than
one year, and not to exceed $30,000 in fair market value on the date of the
grant. Directors will also receive an amount equal to a Director's tax
liability resulting from the stock grant.
================================================================================
PAGE 16 THE PMI GROUP, INC. AND SUBSIDIARIES
EXECUTIVE OFFICERS OF TPG
Set forth below is certain information regarding the named executive officers of
TPG as of December 31, 1996, including age as of April 1, 1997, and business
experience for at least the past five years.
W. ROGER HAUGHTON, 49, President and Chief Executive Officer of TPG and PMI.
See ITEM 1, NOMINEES FOR DIRECTOR OF TPG.
L. STEPHEN SMITH, 47, has been Executive Vice President of Marketing and Field
Operations of PMI since May 1994 and was elected to the same positions with TPG
in January 1995. Prior thereto, he was PMI's Senior Vice President of Field
Operations from September 1993 to May 1994, Senior Vice President of Marketing
and Customer Technology from December 1991 to September 1993 and Vice
President/General Manager of PMI's Eastern Zone from September 1985 to December
1991.
JOHN M. LORENZEN, JR., 52, has been Executive Vice President and Assistant
Secretary of PMI since May 1994 and Chief Financial Officer of PMI since April
1989, and was elected to the same positions with TPG in January 1995. Prior
thereto, he was PMI's Senior Vice President from April 1989 to May 1994 and Vice
President of Finance from April 1985 to April 1989.
CLAUDE J. SEAMAN, 50, has been Executive Vice President of Insurance Operations
and Assistant Secretary of PMI since May 1994, and was elected to the same
positions with TPG in January 1995. Prior thereto, he was PMI's Senior Vice
President of Insurance Operations from March 1993 to May 1994, Vice President of
Claims from December 1991 to March 1993 and Vice President of Underwriting from
January 1987 to December 1991.
BRADLEY M. SHUSTER, 42, has been Senior Vice President, Treasurer and Chief
Investment Officer of PMI since August 1995, and was elected to the same
position with TPG in September 1995. Prior thereto, he was an audit partner
with the accounting firm of Deloitte & Touche LLP from May 1988 to July 1995.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 17
PROXY STATEMENT
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of March 31, 1997, unless otherwise noted,
certain stock ownership information regarding all shareholders known by TPG to
be the beneficial owners of five percent or more of TPG's common stock, each
nominee and current Director of TPG, each Named Executive Officer named in the
1996 Summary Compensation Table herein, and all Directors and executive officers
as a group. For purposes of this table, a beneficial owner is generally any
person or entity that directly, indirectly, or through a family relationship has
or shares the power to vote or direct the vote of the shares, has the power to
trade or dispose of the shares, or has the right to acquire the ownership of any
shares at any time within 60 days through the exercise of any option, warrant,
right, or convertible security.
OWNERSHIP OF COMMON STOCK
============================================================================================================================
COMMON STOCK NOTES
BENEFICIALLY OWNED
-------------------------
NUMBER PERCENTAGE
OF SHARES OF CLASS/1/
- ----------------------------------------------------------------------------------------------------------------------------
BENEFICIAL OWNER * Less than 1%
- ---------------- /1/ As of March 31, 1997, there were outstanding
The Allstate Corporation/2/ 10,560,000 30.17% 33,948,300 shares of common stock, the only
2775 Sanders Road class of voting stock of TPG.
Northbrook, Illinois 60062-6127 /2/ Based on Schedule 13G filed with the Securities
and Exchange Commission ("SEC") on February 26,
1997. The Allstate Corporation held sole voting
AXA Assurances I.A.R.D. Mutuelle/3/ 3,488,227 9.90% and sole disposition power as to 10,560,000
c/o The Equitable Companies Incorp. shares. According to the filing, Allstate, a
787 Seventh Avenue wholly owned subsidiary of The Allstate
New York, NY 10019 Corporation, is the beneficial owner of 10,541,600
shares of common stock. The Allstate Retirement
Plan owns 10,300 shares of common stock. The
The Prudential Insurance 2,196,703 6.27% Allstate Agents Pension Plan owns 8,100 shares of
Company of America/4/ common stock. The Allstate Retirement Plan and The
Prudential Plaza Allstate Agents Pension Plan are employer
751 Broad Street sponsored retirement plans. The Allstate
Newark, NJ 07102-3777 Corporation disclaims beneficial ownership with
respect to shares held by The Allstate Retirement
Plan and The Allstate Agents Pension Plan. By
DIRECTORS AND NOMINEES virtue of the affiliated relationship between
- ---------------------- Allstate and The Allstate Corporation, each of
James C. Castle 1,000 * them may be deemed the beneficial owners of the
Donald C. Clark/5/ 1,300 * common stock.
W. Roger Haughton/6/ 49,068 * /3/ Based on Schedule 13G Amendment No. 2 filed with
Wayne E. Hedien 2,583 * the SEC on February 12, 1997, AXA Assurances
Edward M. Liddy/5/ 1,300 * I.A.R.D. Mutuelle ("AXA") held sole voting power
John D. Roach 1,000 * as to 2,925,127 of such shares and held shared
Kenneth T. Rosen/7/ 1,383 * voting power as to 49,900 of such shares, and sole
Richard L. Thomas 2,500 * dispositive power as to 3,488,227 shares.
Mary Lee Widener 1,383 * According to the filing, AXA has no shared
dispositive power over such shares.
/4/ Based on Schedule 13G filed with the SEC on
OTHER EXECUTIVE OFFICERS January 29, 1997, The Prudential Insurance Company
- ------------------------ of America ("Prudential") held sole voting and
L. Stephen Smith/8/ 21,765 * sole dispositive power as to 207,700 of such
John M. Lorenzen, Jr/9/ 20,836 * shares, held shared voting power as to 1,892,250
Claude J. Seaman/10/ 19,496 * of such shares, and shared dispositive power as to
Bradley M. Shuster/11/ 1,683 * 1,950,250 of such shares. Management believes that
George G. Breed/12/ 23,557 * 2,030,900 shares believed to be held by Jennison
Associates Capital Corporation, a subsidiary of
Prudential, are included in the total shares
ALL DIRECTORS AND EXECUTIVE OFFICERS reported by Prudential.
AS A GROUP (14 PERSONS)/13/ 148,854 * /5/ Does not include 513 shares of common stock
equivalents arising from Director's election to
defer payment of Director's fees pursuant to the
Directors' Deferred Compensation Plan.
/6/ Includes options to purchase 47,083 shares of
common stock exercisable within 60 days of March
31, 1997 and 485 shares of common stock deemed
owned under The PMI Group, Inc. Savings and Profit
Sharing Plan ("401(k) Plan").
/7/ Does not include 559 shares of common stock
equivalents arising from Director's election to
defer payment of Director's fees pursuant to the
Directors' Deferred Compensation Plan.
/8/ Includes options to purchase 21,278 shares of
common stock exercisable within 60 days of March
31, 1997 and 487 shares of common stock deemed
owned under the 401(k) Plan.
/9/ Includes options to purchase 20,350 shares of
common stock exercisable within 60 days of March
31, 1997 and 486 shares of common stock deemed
owned under the 401(k) Plan.
/10/Includes options to purchase 19,011 shares of
common stock exercisable within 60 days of March
31, 1997 and 485 shares of common stock deemed
owned under the 401(k) Plan.
/11/Includes options to purchase 1,567 shares of
common stock exercisable within 60 days of March
31, 1997 and 116 shares of common stock deemed
owned under the 401(k) Plan.
/12/Includes options to purchase 22,071 shares of
common stock exercisable within 60 days of March
31, 1997 and 486 shares of common stock deemed
owned under the 401(k) Plan. Mr. Breed retired
from TPG on December 31, 1996 and, in connection
therewith, relinquished his executive officer
position on November 20, 1996. See"Retirement
Agreement" below.
/13/Includes options to purchase 109,289 shares of
common stock exercisable within 60 days of March
31, 1997.
============================================================================================================================
PAGE 18 THE PMI GROUP, INC. AND SUBSIDIARIES
EXECUTIVE COMPENSATION. Except as otherwise indicated, the following 1996
Summary Compensation Table sets forth information on compensation for 1996 for
the Chief Executive Officer and for each of the five most highly compensated
executive officers (collectively the "Named Executive Officers") of TPG.
1996 SUMMARY COMPENSATION TABLE
====================================================================================================================================
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- -----------------------------------------------------------
AWARDS
------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING LTIP ALL OTHER
YEAR SALARY BONUS/1/ AWARDS/2/ OPTIONS/SARS/3/ PAYOUTS/4/ COMPENSATION/5/
W. ROGER HAUGHTON
President and 1996 $400,000 $199,001 $ 0 20,300 $ 0 $5,580
Chief Executive Officer 1995 $223,667 $ 95,080 288,000 37,785 114,744 3,780
L. STEPHEN SMITH
Executive Vice President
of Marketing & Field 1996 210,100 94,072 0 8,900 0 5,580
Operations 1995 185,752 71,075 0 24,735 56,118 3,780
JOHN M. LORENZEN, JR.
Executive Vice President,
Chief Financial Officer 1996 200,096 89,593 0 8,500 0 5,580
and Assistant Secretary 1995 169,521 76,329 0 24,105 50,582 3,780
CLAUDE J. SEAMAN
Executive Vice President
of Insurance Operations 1996 170,998 68,057 0 5,800 0 5,580
and Assistant Secretary 1995 154,286 66,657 0 23,541 45,924 3,780
BRADLEY M. SHUSTER
Senior Vice President,
Treasurer and 1996 153,315 66,606 0 3,600 0 2,376
Chief Investment Officer 1995 67,750 53,660 0 1,100 0 0
GEORGE G. BREED/6/
Senior Vice President, 1996 170,000 59,203 0 4,000 0 5,580
Secretary and General Counsel 1995 158,739 68,237 0 22,071 47,765 3,780
- ------------------------------------------------------------------------------------------------------------------------------------
Note: Executives also receive tax preparation assistance, automobile allowance
and reimbursed parking.
/1/ Bonus amounts shown for 1996 were earned during 1996 and paid in 1997.
/2/ No restricted stock awards were made in 1996. On December 31, 1996, Mr.
Haughton held 6,000 shares of restricted common stock, which had a market
value of $332,280 valued at the closing stock price of the common stock on
the New York Stock Exchange on December 31, 1996 of $55.38 per share. The
shares were granted on November 15, 1996 and vest in three equal
installments on November 15, 1998, November 15, 1999 and November 15, 2000.
/3/ In February 1995, Mr. Haughton was granted options under The Allstate
Corporation Equity Incentive Plan that automatically converted into options
to purchase 7,785 shares of common stock in April 1995.
/4/ Included in the 1995 amount for Mr. Haughton is $62,613 that was earned for
the three-year period ended 1995 and paid in 1996 under The Allstate
Corporation Long-Term Incentive Plan.
/5/ Represents employer-matching contributions to the Named Executive Officer's
account under The PMI Group, Inc. Savings and Profit Sharing Plan, a
"401(k)" Plan.
/6/ Mr. Breed retired from TPG on December 31, 1996 and in connection
therewith, relinquished his executive officer position on November 20,
1996. See "Retirement Agreement", below.
================================================================================
OPTION GRANTS. The following table is a summary of all TPG stock options granted
to the Named Executive Officers during 1996. Individual grants are listed
separately for each Named Executive Officer. In addition, this table shows the
potential gain that could be realized if the fair market value of TPG's Common
Stock were to appreciate at either a 5 percent or 10 percent annual rate over
the period of the option term.
OPTION/SAR GRANTS IN 1996
====================================================================================================================================
POTENTIAL REALIZABLE VALUE AT
% OF TOTAL OPTIONS/ ASSUMED ANNUAL RATES OF STOCK
NUMBER OF SHARES SARS GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM
UNDERLYING OPTION/ ALL EMPLOYEES IN PRICE EXPIRATION ----------------------------------
SARS GRANTED/1/ FISCAL YEAR/2/ ($/SHARE) DATE 5% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
W. Roger Haughton 20,300 21.8 % $45.88 3/04/06 $585,666 $1,484,193
L. Stephen Smith 8,900 9.5 45.88 3/04/06 256,770 650,705
John M. Lorenzen, Jr. 8,500 9.1 45.88 3/04/06 245,230 621,460
Claude J. Seaman 5,800 6.2 45.88 3/04/06 167,333 424,055
Bradley M. Shuster 3,600 3.9 45.88 3/04/06 103,862 263,207
George G. Breed 4,000 4.3 45.88 12/31/96 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
/1/ The options have a per share exercise price equal to the fair market value
of a share of common stock on the grant date and vest in three equal
installments on the first, second and third anniversaries of the grant. No
SARs were granted during 1996. The required exercise price and tax
withholding may be paid in shares of common stock.
/2/ Represents percentage of total options to purchase common stock granted
under The PMI Group, Inc. Equity Incentive Plan ("Equity Incentive Plan")
to employees of TPG and its subsidiaries during 1996.
================================================================================
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 19
PROXY STATEMENT
The following table shows stock options that were exercised by the Named
Executive Officers during 1996 and the number of shares and value of grants
outstanding as of December 31, 1996 for each of the Named Executive Officers.
No SARs were exercised by the Named Executive Officers during 1996.
AGGREGATED OPTION/SAR EXERCISED
=================================================================================================================================
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR END AT FISCAL YEAR END/1/
SHARES ACQUIRED VALUE ------------------------------- -----------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------------
W. Roger Haughton 0 $ 0 27,116 46,095 $618,877 $765,060
L. Stephen Smith 0 0 10,066 25,390 218,548 437,024
John M. Lorenzen, Jr. 0 0 9,481 24,570 205,346 424,246
Claude J. Seaman 0 0 9,230 21,494 199,864 390,559
Bradley M. Shuster 0 0 367 4,333 2,386 38,965
George G. Breed 900 11,181 22,071 0 471,878 0
- ---------------------------------------------------------------------------------------------------------------------------------
1 Value is based on the closing price of the Common Stock on the New York Stock Exchange on December 31, 1996 of $55.38 per share.
=================================================================================================================================
LONG-TERM INCENTIVE PLAN AWARDS. The following table is a summary of the
performance share awards that were made to the Named Executive Officers during
1996. The performance shares will vest only if TPG's 1996, 1997 and 1998 goals
for net operating income per share and return on equity are achieved. There can
be no assurance that any such targets actually will be achieved, and therefore,
there can be no assurance that any performance shares actually will vest and
become payable. No estimate or assumption in this table is a forecast of TPG's
future performance. For each performance share that vests, the Named Executive
Officer will receive one share of common stock (subject to any adjustments for
any changes in the common stock) or a cash payment in an amount equal to the
fair market value thereof. If a Named Executive Officer terminates employment
before the end of the performance period, the number of performance shares
otherwise payable to him or her may be reduced or forfeited entirely, depending
upon the reason for the termination.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
========================================================================================================================
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICED BASED PLANS
(NUMBER OF SHARES)/3/
NUMBER OF SHARES, PERFORMANCE OR ---------------------------------
UNITS, OR OTHER OTHER PERIOD THRESHOLD TARGET MAXIMUM
Rights/1/ MATURATION OR PAYOUT/2/ (#) (#) (#)
- ------------------------------------------------------------------------------------------------------------------------
W. Roger Haughton 4,200 1996-1998 2,100 4,200 8,400
L. Stephen Smith 1,800 1996-1998 900 1,800 3,600
John M. Lorenzen, Jr. 1,700 1996-1998 850 1,700 3,400
Claude J. Seaman 1,200 1996-1998 600 1,200 2,400
Bradley M. Shuster 750 1996-1998 375 750 1,500
George G. Breed 800 1996-1998 400 800 1,600
/1/ Represents the target number of performance shares granted to each Named
Executive Officer during 1996 under The PMI Group, Inc. Equity Incentive
Plan.
/2/ The performance period runs from January 1, 1996 through December 31, 1998.
/3/ The threshold number of shares is awarded for obtaining the minimum goals,
target shares are awarded for obtaining 100% of the goals and the maximum
number of shares is awarded for exceeding the target goals by a preset
amount.
================================================================================
PAGE 20 THE PMI GROUP, INC. AND SUBSIDIARIES
RETIREMENT AGREEMENT. In connection with Mr. Breed's retirement from TPG at
December 31, 1996, TPG entered into an agreement in May 1996 ("Agreement"),
pursuant to which he relinquished his positions as Senior Vice President,
General Counsel and Secretary of TPG effective November 20, 1996 and resigned as
an active employee of TPG and its subsidiaries effective December 31, 1996.
Under the Agreement, Mr. Breed will be paid $14,167 per month during 1997 and
will receive medical, dental and vision benefits and use of a PMI car during
that period. Mr. Breed received $59,203 as a bonus in February 1997 in
accordance with the terms of the annual incentive compensation plan for the 1996
performance year. Mr. Breed will have until March 31, 1998 to exercise remaining
stock options covering 22,071 shares granted to him on April 10, 1995. Any and
all other awards to Mr. Breed under the Equity Incentive Plan were forfeited
upon execution of the Agreement.
CHANGE OF CONTROL. For stock options granted or performance shares awarded
during 1997, a recipient will have the right to receive accelerated vesting of
100 percent of such options or awards in the event of a "Change of Control" (as
generally defined below). For purposes of the 1997 grants and awards, a "Change
of Control" generally includes: (a) any acquisition of 10 percent or more of
TPG's outstanding common shares; (b) a change in the majority of the Directors
of TPG that is not approved by a majority of the incumbent Directors; (C)
consummation of a merger, consolidation, reorganization, sale or exchange of
substantially all assets or dissolution of TPG ("extraordinary corporate
transaction"); or (d) approval by the shareholders of an extraordinary corporate
transaction.
Notwithstanding the above, with respect to acquisition of 10% more of TPG's
outstanding common shares, Change of Control shall not include: (i) TPG;
(ii) any subsidiary of TPG; (iii) any employee benefit plan of TPG or any
subsidiary, or any entity holding common shares for, or pursuant to, the terms
of any such plan; (iv) The Allstate Corporation and its subsidiaries, and their
respective successors, pending such time that Allstate distributes or transfers
its current ownership interest in the outstanding TPG common stock as
contemplated by the Prospectus dated April 10, 1995 relating to the initial
public offering of the common stock of TPG.
GENERAL COMPENSATION AND BENEFIT PLANS. TPG's Named Executive Officers
participate in certain stock option, retirement and profit-sharing plans
sponsored by TPG, some of which are intended to qualify for tax-favored
treatment under the Internal Revenue Code, as amended ("Code"). These plans
include the Equity Incentive Plan, The PMI Group, Inc. Retirement Plan
("Retirement Plan"), a defined benefit pension plan intended to qualify under
Section 401(a) of the Code, and a nonqualified The PMI Group, Inc. Supplemental
Employee Retirement Plan ("SERP"), designed to provide benefits in excess of
those permitted to be provided under the Retirement Plan because of the Code
limitations described below. The Named Executive Officers are also eligible to
participate in The PMI Group, Inc. Savings and Profit-Sharing Plan ("401(k)
Plan"), a defined contribution plan intended to qualify under Section 401(a) of
the Code. TPG also makes matching and discretionary contributions to the 401(k)
Plan.
The pension benefit under the Retirement Plan and SERP is based on the
executive's average of his or her five highest consecutive years' compensation.
Credited service under the Retirement Plan includes only service after the
completion of TPG's initial public offering in April 1995 (up to a maximum of 35
years). Benefits are computed on a straight-line annuity basis and are not
subject to deduction for Social Security or other offset amounts.
Compensation under the Retirement Plan and SERP is based upon the total annual
cash compensation (up to $160,000 for 1996, as limited by the Code) for services
rendered to PMI and its affiliates, including pre-tax deferrals, but excluding
items such as certain incentive and long-term executive compensation plan
awards, the value of stock awards and employer contributions to profit sharing
plans. Covered compensation under the Retirement Plan in 1996 (without Code
limitations) was $611,327, $338,680, $328,449, $285,075, $170,000 and
$203,226 for Messrs. Haughton, Smith, Lorenzen, Seaman, Breed and Shuster,
respectively. As of
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 21
PROXY STATEMENT
December 31, 1996, Messrs. Haughton, Smith, Lorenzen, Seaman, Breed and Shuster
had approximately 27, 18, 12, 21, 23 and 1 years of credited service,
respectively, under the SERP. Messrs. Haughton, Smith, Lorenzen, Seaman and
Breed each had 1.667 years of credited service under the Retirement Plan. Mr.
Shuster had 1.417 years of credited service under the Retirement Plan. Credited
service for the SERP includes all service with TPG, Sears, Roebuck and Co., and
Allstate.
The following table indicates the annual benefits the Named Executive Officers
would receive at their normal retirement date if they continue as TPG employees
at the specified levels of compensation and for the years of credited service
under the combined formulas of the Retirement Plan and the SERP.
PENSION PLAN TABLE
================================================================================
REMUNERATION YEARS OF SERVICE
----------------------------------------------------------
15 20 25 30 35
- --------------------------------------------------------------------------------
$ 175,000 $ 55,000 $ 74,000 $ 92,000 $110,000 $129,000
200,000 63,000 85,000 106,000 127,000 148,000
225,000 72,000 96,000 120,000 143,000 167,000
250,000 80,000 107,000 133,000 160,000 187,000
275,000 88,000 118,000 147,000 176,000 206,000
300,000 96,000 129,000 161,000 193,000 225,000
325,000 105,000 140,000 175,000 209,000 244,000
350,000 113,000 151,000 188,000 226,000 264,000
375,000 121,000 162,000 202,000 242,000 283,000
400,000 129,000 173,000 216,000 259,000 302,000
425,000 138,000 183,000 229,000 275,000 321,000
450,000 146,000 194,000 243,000 292,000 340,000
475,000 154,000 205,000 257,000 308,000 359,000
500,000 162,000 216,000 271,000 325,000 379,000
525,000 171,000 227,000 284,000 341,000 398,000
550,000 179,000 238,000 298,000 358,000 417,000
575,000 187,000 249,000 312,000 374,000 436,000
600,000 195,000 260,000 326,000 391,000 456,000
625,000 204,000 271,000 339,000 407,000 475,000
- --------------------------------------------------------------------------------
Note: Assumes age 65 normal retirement. Amounts represent total annual benefit
payable under both the Retirement Plan and the SERP.
================================================================================
PAGE 22 THE PMI GROUP, INC. AND SUBSIDIARIES
REPORT OF THE COMPENSATION
AND NOMINATING COMMITTEE
The following Report of the Compensation and Nominating Committee and related
disclosure, including the Performance Graph, shall not be deemed incorporated by
reference by any general statement incorporating this Proxy Statement into any
filing under the Securities Act of 1933 or under the Securities Exchange Act of
1934, except to the extent TPG specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
This report is provided by the Compensation and Nominating Committee of the
Board of Directors to assist shareholders in understanding the Committee's
objectives and procedures in establishing the compensation of TPG's Chief
Executive Officer and other senior TPG officers.
To the Shareholders of The PMI Group, Inc.:
As members of the Compensation and Nominating Committee ("Committee") of the
Board of Directors, it is our responsibility to review and set compensation
levels of the Named Executive Officers of TPG, evaluate the performance of
management and consider management succession and related matters.
The Committee is composed of independent, non-employee members of the Board of
Directors who are not eligible to participate in any of the executive
compensation programs of TPG. The Committee met five times in 1996. The
Committee has from time to time used independent compensation consultants to
assist it in developing an executive compensation philosophy and specific
compensation plans and policies to support that philosophy. Working with such
firms, the Committee has developed and approved an executive compensation
philosophy, as well as base salary, annual incentive and long-term incentive
awards for the 1996 fiscal year.
COMPENSATION PHILOSOPHY. TPG's compensation philosophy is to tie total
compensation for executives closely to the creation of shareholder value. This
philosophy is supported through competitive base salaries that are targeted at
the 50th percentile among a group of peer companies from several insurance and
financial service industry sectors in which TPG competes for executive talent,
through an annual incentive plan that focuses management employees on key
financial measures that promote prudent growth and profitability, and through
long-term incentives under TPG's Equity Incentive Plan that tie rewards directly
to increasing shareholder value and place executives in the same risk/reward
posture as outside shareholders. Compensation levels for 1996 were set using
research conducted by an independent consultant. TPG's competitors for executive
talent are not necessarily the same companies that would be included in an
industry index established to compare shareholder returns because TPG requires
skills and perspectives from a broader range of backgrounds. Thus, the
comparable companies for purposes of executive compensation are not the same as
the industry group index used in the performance comparison graph included in
this Proxy Statement. TPG's focus on shareholder value creation is further
supported by TPG's policy for suggested stock ownership levels for senior
executives.
The Committee also considers whether compensation paid to TPG's Named Executive
Officers will be fully tax deductible to TPG. Section 162(m) of the Internal
Revenue Code as amended (the "Code") contains special rules regarding the
federal income tax deductibility of compensation paid to the CEO and to each of
the other four most highly compensated Named Executive Officers. The general
rule is that annual compensation paid to any of these executives will be
deductible only to the extent that it does not exceed $1,000,000 or qualifies as
"performance-based" compensation under Section 162(m). At present, the
Committee has not adopted an overall policy with respect to Section 162(m)
because the current level of annual compensation paid to each of TPG's Named
Executive Officers is below $1,000,000. Therefore, the Committee currently
expects Code Section 162(m) to have no material effect on TPG.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 23
PROXY STATEMENT
Nevertheless, the Committee intends, to the extent consistent with TPG's best
interest, to take measures to ensure the continued federal income tax
deductibility of TPG's executive compensation. For example, the Equity Incentive
Plan permits the Committee (in its discretion) to grant stock options and
performance shares that will qualify as performance-based compensation under
Code Section 162(m), and therefore, be fully deductible to TPG.
BASE SALARIES. In 1996, the Committee increased salaries of Mr. Haughton and
other Named Executive Officers to reflect its philosophy of paying competitive
compensation and the fact that TPG was publicly held. Previously, salaries were
below the peer group of publicly held companies. The base salaries of the CEO,
Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant
Vice Presidents are set annually by the Committee. TPG seeks to pay its
executives at competitive levels, based on the scope of responsibilities
applicable to each position. Competitive base salary levels are defined as the
median (50th percentile) level among a broader group of companies than would be
included in an industry index established to compare shareholder returns.
ANNUAL INCENTIVES. The 1996 annual incentive award paid cash amounts tied to
(a) specific financial measures supporting continued growth, profitability and
increased shareholder value and/or (b) individual performance objectives. These
measures and objectives are identified by management and approved by the
Committee. The annual incentive award was designed to provide market median
levels of compensation for performance that met individual and/or annual
financial benchmarks set at the beginning of the year and approved by the
Committee. The incentive award provided approximately 75th percentile rewards
for superior performance against these annual objectives and measures.
The 1996 annual incentive award was based upon satisfactory performance of
certain individual performance objectives and/or three TPG performance measures,
which include net operating income growth, insurance in force growth and
combined ratio levels. No payouts are made as an annual incentive award unless
TPG earns a threshold return on average equity level that exceeds a risk-free
rate of return (i.e., the 10-year U.S. Treasury bond rate) for the year. The
Committee also retains discretion to waive performance measures and alter award
amounts. The 1996 annual incentive awards for all Named Executive Officers,
except for Mr. Shuster, were based solely on meeting the three TPG performance
measures. For 1996, Mr. Shuster had an additional individual objective tied to
the results of TPG's investment portfolio.
The targets for TPG's performance measures are approved by the Committee shortly
after the beginning of each fiscal year (they have already been approved for the
1997 fiscal year). Similarly, the Committee certifies annually that awards
payable as annual incentives correspond to performance goals and the target
level established at the beginning of the year. TPG's independent auditors
perform certain incentive compensation recomputation procedures and issue a
report to TPG of their result. The Committee retains discretion to alter the
award otherwise payable to any executive and/or to pay a bonus for the
achievement of other objectives.
For 1996, Mr. Haughton's annual incentive award was based on the three TPG
performance measures. Mr. Haughton's annual incentive award ranges from 0
percent to 100 percent of his base salary, depending upon actual achievement of
performance measures established by TPG. For 1996, Mr. Haughton received an
annual incentive award of $199,001 representing the target amount or 50 percent
of his base salary.
LONG-TERM INCENTIVES. The purpose of TPG's long-term incentive program is to
reward top management for increasing shareholder value and to develop stock
ownership among key executives. The Committee's long-term incentive philosophy
provides for annual awards under the Equity Incentive Plan of stock options and
performance shares to the CEO, Executive Vice Presidents and Senior Vice
Presidents, and for the award of stock options alone to Vice Presidents and
Assistant Vice Presidents.
Stock options vest over three years and have an exercise price equal to 100
percent of fair market
PAGE 24 THE PMI GROUP, INC. AND SUBSIDIARIES
value on the date of grant, with a maximum term of up to 12 years. Performance
shares, which are granted only to Senior Vice Presidents and above, are earned
based on TPG's performance against certain financial measures over a three-year
period. Performance shares are payable in shares of stock or cash, as determined
by the Committee. Performance shares for the performance period 1996 through
1998 will be earned based upon average annual growth in net operating income
over that three-year period. Any awards earned during the cycle will be paid in
early 1999 and only if the three-year average return on equity is at least four
percentage points above the 10-year Treasury Bond yield over the same period.
The Committee has all discretion and authority necessary or appropriate to waive
performance measures or goals and alter award amounts.
In accordance with the Equity Incentive Plan and in connection with the
compensation levels approved by the Committee for key executives, in 1996, Mr.
Haughton was granted stock options covering 20,300 shares and a target award of
4,200 performance shares both in consideration of his role and importance to TPG
and to strongly align him with shareholder objectives. The stock options vest
over three years and have an exercise price of $45.88 per share (100 percent of
the fair market value on the date of grant), with a maximum term of 10 years.
The performance shares will vest only if TPG's 1996, 1997 and 1998 goals for net
operating income per share and return on average equity are achieved.
COMPENSATION AND NOMINATING COMMITTEE OF THE BOARD OF DIRECTORS
DR. KENNETH T. ROSEN, CHAIRMAN
DONALD C. CLARK
WAYNE E. HEDIEN
MARY LEE WIDENER
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 25
PROXY STATEMENT
PERFORMANCE GRAPH
The graph shown below compares the cumulative total shareholder return for TPG's
common stock since its initial public offering on April 10, 1995 with that of
the Standard & Poor's 500 Index and the Russell 1000 Financial Services Index.
The graph plots the changes in value of an initial $100 investment over the
indicated time periods, assuming all dividends are reinvested quarterly. The
total shareholders' returns are not necessarily indicative of future returns.
COMPARISON OF THE PMI GROUP, INC. AND BENCHMARKS
TOTAL RETURN INDEX
TOTAL RETURN AND TOTAL RATE OF RETURN
[PERFORMANCE GRAPH APPEARS HERE]
============================================================================================================
TOTAL RATE
3/95 6/95 9/95 12/95 3/96 6/96 9/96 12/96 OF RETURN*
- ------------------------------------------------------------------------------------------------------------
S&P 500 100.00 109.55 118.25 125.38 132.11 138.14 142.31 154.17 54.17%
THE PMIGROUP, INC. N/A 127.88 139.82 133.69 129.05 125.87 157.48 164.30 64.30%
RUSSELL 1000
FINANCIAL SERVICES 100.00 111.73 128.23 135.18 145.48 148.02 160.48 181.25 81.25%
- ------------------------------------------------------------------------------------------------------------
Note: These numbers represent an index of total return performance of TPG's
common stock vs. the S & P 500 and Russell 1000 Financial Services indices using
the starting date of 3/31/95 with a value of 100. For The PMI Group, Inc., the
starting date (value of 100) was 4/10/95, when the IPO was priced.
*Total Return = Capital Appreciation + Income
================================================================================
PAGE 26 THE PMI GROUP, INC. AND SUBSIDIARIES
SECTION 16(A) BENEFICIAL
OWNERSHIP REPORTING
COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires TPG's Directors
and executive officers, and persons who own more than 10 percent of TPG's common
stock to file with the SEC initial reports of ownership and reports of changes
in ownership of the common stock. Directors, officers and more than 10 percent
shareholders are required by SEC regulations to furnish TPG with copies of all
Section 16(a) forms they file.
Except as stated below, based solely on a review of the copies of such reports
furnished to TPG and written representations from certain reporting persons that
no other reports were required from such persons, TPG believes that, during
fiscal year 1996, all Section 16(a) filings requirements were satisfied on a
timely basis.
Bradley M. Shuster, Senior Vice President, Treasurer and Chief Investment
Officer of TPG, inadvertently omitted to file a Form 4, to reflect an option
grant made in connection with his initial employment by TPG. Upon becoming aware
of the omission, Mr. Shuster promptly filed a Form 5 to report the option grant.
TRANSACTIONS WITH ALLSTATE
Set forth below is a description of certain agreements between TPG, PMI,
Allstate and its affiliates. Mr. Liddy, Chairman of the Board of TPG, also is
President and Chief Operating Officer of Allstate and its parent.
. In 1993, PMI entered into a reinsurance agreement with Forestview Mortgage
Insurance Co. ("Forestview"), a wholly-owned subsidiary of Allstate, whereby
Forestview agreed to reinsure all liabilities (net of amounts collected from
third party reinsurers) in connection with PMI's mortgage pool insurance
business in exchange for premiums received. In 1994, Forestview also agreed
to fully assume PMI's mortgage pool insurance business upon receipt of all
required regulatory approvals. Pursuant to this agreement, during 1996, PMI
ceded approximately $15.2 million of premiums to Forestview, and Forestview
reimbursed PMI for claims on the covered policies in the amount of
approximately $59.4 million.
. In 1994, TPG and Allstate entered into a Services Agreement whereby Allstate
pays fees to TPG based on TPG's costs incurred in providing operational
support to Forestview.
. On October 28, 1994, TPG entered into a Runoff Support Agreement with
Allstate (the "Runoff Support Agreement") to replace various capital support
commitments that Allstate had previously provided to PMI. Allstate agreed to
pay claims on certain insurance policies issued by PMI prior to October 28,
1994, if PMI's financial condition deteriorates below specified levels, or if
a third party brings a claim thereunder. Alternatively, Allstate may make
contributions directly to PMI or TPG. In the event that Allstate makes
payments or contributions under the Runoff Support Agreement (which
possibility management believes is remote), Allstate would receive
subordinated debt or preferred stock of PMI or TPG in return. During 1996, no
payment obligation arose under the Runoff Support Agreement.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 27
PROXY STATEMENT
. Allstate Research and Planning Center was paid approximately $93,607 by PMI
in 1996 in connection with providing support of PMI's automated underwriting
risk analysis system and other risk management related analysis. Such
services are expected to continue to be provided in the future.
. TPG, PMI, The Allstate Corporation and Allstate have entered into a
Separation Agreement that provides, among other matters, that for so long as
The Allstate Corporation and its affiliates own at least 30 percent of TPG's
common stock, The Allstate Corporation will be allowed to designate for
nomination to TPG's Board of Directors two members of The Allstate
Corporation's management. TPG and The Allstate Corporation have agreed to
cooperate to cause their respective nominees to be elected to TPG's Board of
Directors.
COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER
PARTICIPATION
The Compensation and Nominating Committee of the Board of Directors consists of
Dr. Rosen, Chairman, Mr. Clark, Mr. Hedien and Ms. Widener. No executive officer
of TPG served on the compensation committee of another entity or on any other
committee of the board of directors of another entity performing similar
functions during the last fiscal year.
PAGE 28 THE PMI GROUP, INC. AND SUBSIDIARIES
ITEM 2: RATIFICATION OF
APPOINTMENT OF INDEPENDENT
AUDITORS
Subject to shareholder ratification, the Board of Directors has appointed
Deloitte & Touche LLP as independent public auditors to audit the financial
statements of TPG for 1997. Deloitte & Touche LLP has audited the financial
statements of TPG annually since 1994. One or more representatives of Deloitte
& Touche LLP are expected to be present at the Annual Meeting of Shareholders
and to respond to appropriate questions. This proposal is presented to the
shareholders in order to permit them to participate in the selection of TPG's
auditors. If the shareholders do not ratify the appointment of Deloitte &
Touche LLP, the Board of Directors of TPG will consider the appointment of other
auditors. Deloitte & Touche LLP also performed internal audit and tax related
services in 1996 and is performing such services in 1997.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
---
PROPOSAL TO RATIFY THE APPOINTMENT OF DELOITTE & TOUCHE LLP.
OTHER MATTERS
The Board of Directors does not know of any matters to be acted upon at the
Annual Meeting of Shareholders except as specified in the Notice of Annual
Meeting of Shareholders. However, as to any other business that may properly
come before the Annual Meeting of Shareholders, it is intended that proxies, in
the form enclosed, will be voted in respect thereof in accordance with the
judgment of the persons voting such proxies in consultation with the Board of
Directors.
SHAREHOLDER PROPOSALS
FOR 1998 ANNUAL MEETING
Shareholders are entitled to present proposals for action at a forthcoming
shareholders' meeting if they comply with the requirements of the proxy rules.
Any proposals intended to be presented at the 1998 Annual Meeting of
Shareholders must be received at TPG's offices on or before December 16, 1997 in
order to be considered for inclusion in TPG's proxy statement and form of proxy
relating to such meeting.
/s/ Victor J. Bacigalupi
Victor J. Bacigalupi
Senior Vice President,
General Counsel and Secretary
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING,
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY
AS PROMPTLY AS POSSIBLE
IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 29
[Blank page]
I N D E X T O F I N A N C I A L S
32 Five Year Summary of Financial Data
33 Management's Discussion and Analysis of Financial
Condition and Results of Operations
42 Consolidated Statements of Operations
43 Consolidated Balance Sheets
44 Consolidated Statements of Shareholders' Equity
45 Consolidated Statements of Cash Flows
47 Notes to Consolidated Financial Statements
61 Report of Management
61 Report of Independent Auditors
63 Board of Directors
64 Officers
65 Shareholders' Information
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 31
F I V E Y E A R S U M M A R Y O F F I N A N C I A L D A T A
(In thousands, except per share data) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SUMMARY OF CONSOLIDATED OPERATIONS:
Net premiums written $ 403,020 $ 314,021 $ 277,747 $ 291,089 $ 208,602
=========== =========== =========== =========== ===========
Premiums earned $ 412,738 $ 328,756 $ 296,345 $ 268,554 $ 173,039
Investment income, less
investment expense 67,442 62,041 56,774 45,733 40,847
Realized capital gains
and losses 14,296 11,934 3,064 1,229 686
Other income 6,948 2,309 3,802 -- --
----------- ----------- ----------- ----------- -----------
Total revenues 501,424 405,040 359,985 315,516 214,572
Total losses and expenses 279,318 224,499 221,434 202,543 119,912
----------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes 222,106 180,541 138,551 112,973 94,660
Income tax expense
(benefit)* 64,188 45,310 32,419 24,305 (10,911)
----------- ----------- ----------- ----------- -----------
Income from continuing
operations* 157,918 135,231 106,132 88,668 105,571
Income (loss) from discontinued
operations -- -- -- (28,863) 6,726
----------- ----------- ----------- ----------- -----------
Net income $ 157,918 $ 135,231 $ 106,132 $ 59,805 $ 112,297
=========== =========== =========== =========== ===========
MORTGAGE INSURANCE OPERATING RATIOS:
Loss ratio 41.9% 38.5% 40.5% 41.4% 33.2%
Expense ratio 18.4% 24.9% 30.1% 28.2% 27.0%
----- ----- ----- ----- -----
Combined ratio 60.3% 63.4% 70.6% 69.6% 60.2%
===== ===== ===== ===== =====
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 1,509,919 $ 1,304,440 $ 1,097,421 $ 985,129 $ 815,136
Reserve for losses and
loss adjustment expenses $ 199,774 $ 192,087 $ 173,885 $ 135,471 $ 94,002
Long-term obligations $ 99,342 -- -- -- --
Shareholders' equity $ 986,862 $ 870,503 $ 687,178 $ 575,300 $ 513,583
PER SHARE DATA:
Income from continuing
operations $ 4.51 $ 3.85 $ 3.03 $ 2.53 $ 3.02
Income (loss) from
discontinued operations -- -- -- (0.82) 0.19
----------- ----------- ----------- ----------- -----------
Net income $ 4.51 $ 3.85 $ 3.03 $ 1.71 $ 3.21
=========== =========== =========== =========== ===========
Shareholders' equity $ 28.60 $ 24.87 $ 19.63 $ 16.44 $ 14.67
Cash dividends declared $ 0.20 $ 0.15 -- -- --
PMI OPERATING AND STATUTORY DATA:
Number of policies in force 700,084 657,800 612,806 543,924 428,745
Default rate 2.19% 1.98% 1.88% 1.81% 2.03%
Persistency 83.3% 86.4% 83.6% 70.0% 74.6%
Direct primary insurance
in force (in millions) $ 77,312 $ 71,430 $ 65,982 $ 56,991 $ 43,698
Direct primary risk in
force (in millions) $ 17,336 $ 15,130 $ 13,243 $ 11,267 $ 8,676
Statutory capital $ 988,475 $ 824,156 $ 659,402 $ 494,621 $ 456,931
Risk-to-capital ratio 15.9:1 15.8:1 17.7:1 20.8:1 19.0:1
Total PMI employees 586 578 586 632 529
* During 1991, the Company increased its tax liabilities and income tax expenses by $40.9 million in light of an unfavorable
judgment by the U.S. Tax Court. In 1992, the 1991 judgment was overturned, and the Company reevaluated its tax balances and reduced
its tax liabilities and income tax expense by $30.9 million.
PAGE 32 THE PMI GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
1996 VERSUS 1995
Consolidated net income in 1996 was $157.9 million, a 16.8% increase over net
income of $135.2 million in 1995. The increase was attributable to increases
primarily in premiums earned and secondarily in investment income (including
capital gains) of 25.5% and 10.5%, respectively, partially offset by increases
primarily in losses and loss adjustment expenses and secondarily in underwriting
and other expenses (including interest expense) of 35.1% and 13.7%,
respectively. Premiums earned increased primarily from the ongoing mortgage
insurance operations, secondarily from a one time impact of a cancellation of a
quota share treaty with its primary reinsurers, and also from the title
insurance operations. Earnings per share were $4.51 in 1996 compared with $3.85
in 1995, a 17.1% increase. Excluding capital gains, earnings per share were
$4.24 in 1996 compared with $3.63 in 1995, a 16.8% increase. Revenues in 1996
were $501.4 million, a 23.8% increase over revenues of $405.0 million in 1995.
PMI Mortgage Insurance Co.'s ("PMI") new insurance written ("NIW") totaled $17.9
billion in 1996 compared with $14.5 billion in 1995, a 23.4% increase. The
increase in NIW resulted primarily from the number of new mortgage insurance
policies issued increasing by 19.5%, to 142,900 policies in 1996 from 119,600
policies in 1995, and secondarily from an increase in the average loan size to
$125,100 from $120,900. NIW net of quota share reinsurance increased by 39.3% to
$17.0 billion in 1996 from $12.2 billion in 1995. This increase was affected by
three factors: first, the increase in gross NIW; second, effective for new
policies written in 1996, PMI reduced its percentage of quota share cessions
from approximately 15% in 1995 to 5% in 1996; third, effective December 31, 1996
PMI terminated and commuted its reinsurance agreement with its primary
reinsurers, Centre Reinsurance Company of New York and Centre Reinsurance
International Company, collectively referred to as "Centre Re". The impact of
the Centre Re commutation is described below.
One of the factors contributing to the increase in new policies issued was
growth in market share in 1996 compared with 1995. PMI's market share of NIW
increased to 14.1% during 1996 from 13.2% in 1995. On a combined basis with CMG
Mortgage Insurance Company ("CMG"), market share increased to 14.7% in 1996
compared with 13.5% in 1995. CMG is a 45% owned affiliate of PMI and is
accounted for on the equity method in the Company's consolidated financial
statements. A second factor was the growth in the total number of insurable loan
originations in the mortgage insurance industry in 1996 compared with 1995,
which was caused by increases in the purchase market and refinancing activity
primarily in the first half of 1996. Refinancing as a percentage of PMI's NIW
increased by 5.4 percentage points, to 16.9% in 1996 from 11.5% in 1995.
Consistent with the industry, PMI experienced a significantly higher level of
refinance business in the first half of 1996 as compared with the second half of
1996.
PMI (excluding CMG) experienced a drop in market share of NIW from the third
quarter of 1996 to the fourth quarter of 1996, from 14.7% to 13.7%. It is
management's conclusion that this drop in market share was due to increases in
product competition, including the availability of a pool insurance product not
offered by PMI. During the first quarter of 1997, competitive pressures
continued to adversely impact market share, and management expects this trend to
continue into the second quarter of 1997. See Cautionary Statement.
PMI's persistency rate (percentage of insurance remaining in force from one year
prior) decreased 3.1 percentage points during 1996, and stands at 83.3% as of
December 31, 1996 compared with 86.4% as of December 31, 1995. The persistency
rate leveled off in the second quarter of 1996 and experienced slight but
consistent improvements in the third and fourth quarters. This trend is
consistent with PMI's refinancing activity during 1996. Insurance in force grew
at a rate of 8.3% during 1996 to a total of $77.3 billion at December 31, 1996
compared with $71.4 billion at December 31, 1995. The higher level of NIW in
1996 compared with 1995, coupled with the slight rebound in persistency during
the second half of 1996, slightly improved
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 33
the 1996 growth rate of insurance in force to 8.3% over the 1995 rate of 8.2%.
Mortgage insurance net premiums written were $349.8 million in 1996 compared
with $273.7 million 1995, an increase of 27.8%. The increase is attributable
primarily to the increase in NIW over the 1995 level, secondarily to the Centre
Re commutation, and also to higher average premiums resulting from the
increasing shift to deep coverage loans, higher average loan sizes and the
growth of insurance in force. New premiums written decreased by 15.6% to $21.6
million in 1996 from $25.6 million in 1995, while renewal premiums increased by
22.3% to $345.1 million in 1996 from $282.1 million in 1995. The decrease in new
premiums written during 1996 resulted primarily from the continuing shift to the
monthly premium product from an annual premium product. The monthly premium plan
as a percentage of NIW represented 95.1% of NIW in 1996 compared with 85.2% in
1995, and 96.6% in the fourth quarter of 1996 compared with 91.0% in the
corresponding period of 1995.
The increase in average premiums was caused by a continuing shift to mortgages
with loan-to-value ratios greater than 90% and equal to or less than 95% ("95s")
with increased insurance coverage, partially offset by a decrease in the use of
adjustable rate mortgages (ARMs). 95s with 30% coverage increased to 41.8% of
NIW in 1996 compared with 34.7% in 1995. Similarly, mortgages with loan-to-value
ratios greater than 85% and equal to or less than 90% ("90s") with 25% coverage
increased to 41.7% in 1996 compared with 32.9% in 1995. ARMs decreased to 13.4%
of NIW in 1996 compared with 21.3% in 1995.
Refunded premiums increased by 24.0% in 1996 to $15.5 million from $12.5 million
in 1995. This was due primarily to the increase in policy cancellations related
to the growth in mortgage refinancing volume during the first half of 1996.
Mortgage insurance ceded premiums were $1.3 million in 1996 compared with $21.5
million in 1995, while PMI's ceded premiums written as a percentage of net new,
renewal and refunded premiums decreased to 0.2% in 1996 compared with 9.2% in
1995. The reduction of ceding percentages in 1996 was due primarily to the
Centre Re commutation and secondarily to a larger portion of premiums remaining
with the Company through the use of Residential Guaranty Co. ("RGC"), a
subsidiary of The PMI Group, Inc. ("TPG"), as a reinsurer.
Mortgage insurance premiums earned increased 24.6% to $359.5 million in 1996
from $288.5 million in 1995. This increase is due primarily to the increase in
NIW over the 1995 level, secondarily to the Centre Re commutation, and also to
the growth in insurance in force in 1996 over 1995, the impact of higher premium
rates resulting from the shift to increased insurance coverage products and
higher average loan sizes.
The Company's net investment income in 1996 was $67.4 million compared with
$62.0 million in 1995, an increase of 8.7%. The increase was primarily
attributable to the growth in the average amount of invested assets, which
resulted from cash flows generated by operating activities, partially offset by
a decrease in the average investment yield (pretax) to 6.1% in 1996 from 6.5% in
1995. Realized capital gains (net of losses) reported an increase over 1995, up
20.2% to $14.3 million in 1996 from $11.9 million in 1995.
Mortgage insurance losses and loss adjustment expenses increased to $150.6
million in 1996 from $111.0 million in 1995, an increase of 35.7%. This increase
was due primarily to the growth and maturation of insurance in force,
secondarily to the Centre Re commutation, and also to increased claim amounts
associated with the higher coverage percentages, higher loan sizes and an
increase in the default rate.
The majority of claims under PMI policies have historically occurred during the
third through the sixth years after issuance of the policies. Insurance written
by PMI from the period January 1, 1991 through December 31, 1994 represents
55.4% of PMI's insurance in force at December 31, 1996, with the 1993 book of
business alone representing 22.5%. This substantial volume of PMI's business is
in its expected peak claim period. Consistent with increasing coverage
percentages and increasing mortgage principal amounts, claim amounts have risen
in recent years. Claims paid in 1996 were $130.1 million compared with $93.7
million in 1995.
PAGE 34 THE PMI GROUP, INC. AND SUBSIDIARIES
Also, PMI has been experiencing an acceleration in its claim payment process.
This acceleration is a result of Fannie Mae's and Freddie Mac's loss mitigation
efforts to make earlier determinations regarding delinquent loans and to
accelerate the loan foreclosure and claim process. Management believes that this
is only an acceleration of the timing of payments, and will not increase the
expected number of claims ultimately paid by PMI.
Policies written in California accounted for approximately 73% and 67% of the
total dollar amount of claims paid in 1996 and 1995, respectively. Although
management expects that during 1997 California will continue to account for the
majority of total claims paid, management also anticipates that California
claims paid as a percentage of total claims paid will begin to decline
consistent with the decline in default rates on PMI's California policies
discussed below. Accordingly, management anticipates the average claim size to
decrease over the long term.
In addition to claim increases, PMI's default rate has increased to 2.19% at
December 31, 1996 from the December 31, 1995 rate of 1.98%. This increase was
primarily caused by a growth in the inventory level of notices of delinquency
due primarily to the maturation of PMI's 1992 and 1993 books of business.
Management expects this trend to continue in 1997. See Cautionary Statement.
Default rates on PMI's California policies decreased to 3.81% at December 31,
1996, from 4.08% at December 31, 1995. Policies written in southern California
in the years 1989 through 1993, which are in the historically highest claim
period, are also generally believed to have been written at the high point of
southern California real estate prices. The California economy continues to
recover more slowly than anticipated when the policies were issued. Accordingly,
California default rates for each of the policy years since 1989 may continue to
experience an average default rate higher than the national average default
rate. However, the default rates for California experienced year over year
improvements in the third and fourth quarters of 1996, and management expects
this trend to continue in 1997. See Cautionary Statement.
Mortgage insurance underwriting and other expenses decreased to $64.4 million in
1996 from $68.0 million in 1995, or 5.3%. This decrease, in contrast to the
growth rate in NIW, is primarily the result of management's focus on controlling
expenses and the expense ratio, and secondarily to the Centre Re commutation.
The mortgage insurance loss ratio increased to 41.9% in 1996 compared with 38.5%
in 1995 due to the increase in losses and loss adjustment expenses discussed
above. The expense ratio reported an improvement over 1995, dropping to 18.4% in
1996 from 24.9% in 1995, resulting in a combined ratio of 60.3% in 1996, 3.1
percentage points better than the 1995 ratio of 63.4%. The impact of the Centre
Re commutation was to decrease the stated mortgage insurance expense ratio for
1996 by approximately two percentage points and to increase the loss ratio by a
corresponding amount. The net impact of the Centre Re commutation was immaterial
to the mortgage insurance combined ratio for the year ending December 31, 1996.
Title insurance premiums earned increased 32.0% to $53.2 million in 1996
compared with $40.3 million in 1995. This improvement was due to expansion
efforts of the title business, as well as the overall improvement in the volume
of residential mortgage originations. Underwriting and other expenses increased
31.5% to $48.0 million in 1996 compared to $36.5 million in 1995. This increase
is directly attributable to the increase in premiums earned. The title insurance
combined ratio decreased to 93.5% in 1996 from 95.4% in 1995. The title
insurance industry expense ratios are much higher than those experienced in the
mortgage insurance industry primarily because the commission rates paid to title
agencies and attorneys are substantially higher than those paid to mortgage
insurance sales agents.
Other income, primarily revenues generated by PMI Mortgage Services Co. ("MSC"),
increased to $6.9 million in 1996 from $2.3 million in 1995. This growth is
primarily due to increased mortgage services operations resulting from higher
refinancing activity and expansion of its contract underwriting services.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 35
The Company's effective tax rate was 28.9% in 1996 compared to 25.1% in 1995.
The benefits of tax-preference investment income and other permanent differences
reduced the effective rates below the statutory rate of 35% during both periods.
The increase in the effective rate in 1996 over 1995 was due to a greater
portion of operating income generated from insurance operations rather than
tax-free bond income, the state tax effect of PMI's $25.0 million cash dividend
and transfer of American Pioneer Title Insurance Company ("APTIC") to TPG, and a
shift in the mix of the investment portfolio to a greater portion of taxable
fixed-income bonds.
1995 VERSUS 1994
Net income in 1995 was $135.2 million, a 27.4% increase over 1994 net income of
$106.1 million. The increase was primarily attributable to increases in premiums
earned and investment income (including capital gains) of 10.9% and 23.6%,
respectively, and a decrease in operating expenses of 5.0%, partially offset by
an increase in losses and loss adjustment expenses of 8.6%. Earnings per share
were $3.85 for the year compared with $3.03 in 1994, a 27.1% increase. Excluding
capital gains, earnings per share were $3.63 in 1995 compared with $2.97 in
1994, a 22.2% increase. Revenues in 1995 were $405.0 million, a 12.5% increase
over revenues of $360.0 million in 1994.
New mortgage insurance written totaled $14.5 billion in 1995 compared with $18.4
billion in 1994, a 21.2% decrease. The decrease in NIW resulted from the number
of new mortgage insurance policies written declining by 23.3%, to 119,600
policies in 1995 from 156,000 policies in 1994. One of the factors contributing
to this decrease was the drop in refinancing activity in 1995 versus 1994.
Refinancings showed a significant decrease of 56.4% to 12,300 policies in 1995
from 28,200 policies in 1994. Refinancing as a percentage of NIW decreased by
6.8 points, to 11.5% in 1995 from 18.3% in 1994. The number of policies written
for new purchases also dropped in 1995 from the 1994 level, to 107,300 from
127,800, a 16.0% decline. Management believes that a second contributing factor
to the decline in total NIW was PMI's reluctance to aggressively participate in
a market which displayed a deteriorating trend in borrower credit quality
beginning in late 1994 and continuing into 1995. Consequently, PMI's market
share of NIW in 1995 declined to 13.2% compared to 14.0% in 1994.
PMI's persistency rate increased 2.8 points in 1995 over the 1994 rate, to 86.4%
from 83.6%. This increase is primarily attributable to the decrease in
refinancing activity in 1995. The increased persistency contributed to the
growth of insurance in force to $71.4 billion at December 31, 1995, from $66.0
billion at December 31, 1994. Growth in insurance in force continued during 1995
at a slower pace than the 1994 growth level, 8.2% in 1995 versus 15.8% in 1994,
primarily due to the decrease in NIW.
Mortgage insurance net premiums written in 1995 were $273.7 million, compared
with $232.3 million in 1994, an increase of 17.8%. The increase is primarily
attributable to higher renewal premiums due to improved persistency and to a
decline in ceded and refunded premiums, partially offset by a decline in new
premiums written. The decline in new premiums written in 1995 was due to the
decrease in NIW in 1995 from 1994, and the increasing usage of the monthly
premium plan in 1995. The increase in net premiums written is also attributable
to higher average premiums for NIW during 1995 compared with 1994. The higher
average premiums were caused by an increasing shift to 95s with deeper coverage,
partially offset by a decline in the use of ARMs. 95s with 30% coverage
increased to 34.7% of NIW in 1995 compared with 1.2% in 1994, while ARMs
decreased to 21.3% of NIW in 1995 compared with 29.7% in 1994. The deeper
coverage percentages are primarily a result of changes in Fannie Mae and Freddie
Mac coverage requirements effective in 1995. The new deeper coverage percentages
for 30 year loans include 30 percent coverage on 95s and 25 percent coverage on
90s.
PMI's monthly premium plan experienced significant growth in popularity during
1995, its first full year in PMI's product line. The monthly plan represented
85.2% of NIW in 1995, up 48.2 points from the 1994 level of 37.0%. This trend
toward the monthly premium product has significantly impacted PMI's premium mix
from new to renewals. The monthly product spreads the receipt of
PAGE 36 THE PMI GROUP, INC. AND SUBSIDIARIES
premiums over 12 equal monthly payments (which initially reduces the amount of
premiums written), compared to the annual prepayment method (where the entire
annual premium is recorded as written at the effective date of the policy). For
the monthly premium plan, PMI recognizes only the first month's premium as new
premium written while subsequent monthly premium payments are recognized as
renewal premiums. Management believes that the monthly premium plan does not
significantly impact net premiums earned. The monthly premium products have been
priced to compensate for the different timing of cash flows (as compared to
annual premium products) and the related impact on investment income, and,
accordingly, will have no significant effect on the Company's results of
operations.
Refunded premiums in 1995 decreased by 15.0% to $12.5 million from $14.7 million
in 1994 due primarily to the decrease in refinancing volume during 1995. Ceded
premiums written as a percentage of net new, renewal and refunded premiums
decreased to 9.2% in 1995 compared to 10.4% in 1994.
Mortgage insurance premiums earned increased 15.0% to $288.5 million in 1995
from $250.9 million in 1994. This increase is due primarily to the growth in
insurance in force in 1995 over 1994 and the impact of higher premium rates from
the shift to deeper coverage products.
The Company's net investment income in 1995 was $62.0 million compared with
$56.8 million in 1994, an increase of 9.2%. The increase was primarily
attributable to the growth in the average amount of invested assets, which
resulted from positive cash flows generated by operating activities, partially
offset by a decrease in the effective yield. The average effective yield
(pretax) on the portfolio's invested value during 1995 decreased to 6.5% from
6.9% in 1994, primarily due to an increasing portion of the portfolio being
invested in lower yielding, tax-exempt municipal bonds. Realized capital gains
(net of losses) reported a significant increase over 1994, up $8.8 million to
$11.9 million in 1995 from $3.1 million in 1994. This increase is consistent
with the 1995 stock market performance.
Mortgage insurance losses and loss adjustment expenses increased to $111.0
million in 1995 from $101.6 million in 1994, an increase of 9.3%. This increase
was primarily the result of the growth in insurance in force in recent years and
the increased default rates and claim amounts in certain areas of the country,
particularly California.
Consistent with increasing coverage percentages and increasing mortgage
principal amounts, claim amounts have risen in recent years, while PMI's book of
business continues to mature into the higher-frequency claim period. Insurance
written by PMI in the period from January 1, 1990 through December 31, 1993
represented 51.6% of PMI's insurance in force at December 31, 1995. In addition,
PMI's default rate has increased over the 1994 level by 10 basis points, from
1.88% to 1.98% at December 31, 1995.
Mortgage insurance underwriting and other expenses decreased 2.7% to $68.0
million in 1995 from $69.9 million in 1994. This decrease is primarily the
result of the decrease in NIW in 1995.
The mortgage insurance loss ratio decreased to 38.5% in 1995 compared with 40.5%
in 1994 due, in part, to a $20.7 million decrease in prior year reserves
recorded in 1995. The expense ratio also reported an improvement over 1994,
dropping to 24.9% in 1995 from 30.1% in 1994, resulting in a combined ratio of
63.4% in 1995, 7.2 points better than the 1994 ratio of 70.6%.
Title insurance premiums earned decreased 11.2% to $40.3 million in 1995
compared with $45.4 million in 1994. Underwriting and other expenses decreased
9.9% to $36.5 million in 1995 compared to $40.5 million in 1994. These decreases
are attributable to an overall decline in the volume of residential mortgage
originations. The title insurance combined ratio increased slightly to 95.4% in
1995 from 94.1% in 1994.
Other income, primarily revenues generated by MSC, decreased to $2.3 million in
1995 from $3.8 million in 1994, a 39.5% decline. This decrease is primarily due
to reduced mortgage services operations resulting from lower refinancing
activity.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 37
The Company's effective tax rate was 25.1% in 1995 compared to 23.4% in 1994.
The benefits of tax-preference investment income and other permanent differences
reduced the effective rates below the statutory rate of 35% during both periods.
The increase in the effective rate in 1995 over 1994 was primarily due to a
greater portion of operating income generated from insurance operations rather
than tax-free bond income.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Liquidity and capital resource considerations are different for TPG and PMI, its
principal insurance operating subsidiary, as discussed below.
TPG's principal sources of funds are dividends from its subsidiaries, PMI and
APTIC, cash and investment income thereon and funds that may be raised from time
to time in the capital markets. In February 1996, TPG executed two bank credit
agreements totaling $50.0 million. At December 31, 1996, there were no
outstanding borrowings under the agreements. In November 1996, TPG publicly
issued $100 million of 6.75% 10-year notes. Net proceeds to the Company, after
underwriters' discount, were $99.3 million. In February 1997, TPG privately
issued $100 million 8.309% capital securities. Such securities are redeemable
after February 2007 and in no event beyond February 2027, exclusive of certain
tax events. The net proceeds, totaling $99.0 million, will be used for general
corporate purposes, including common stock repurchases, acquisitions and
additions to the investment portfolio.
TPG's principal uses of funds are common stock repurchases, the payment of
dividends to shareholders, payment of operating expenses, funding of
acquisitions, additions to the investment portfolio and investments in
subsidiaries.
As of December 31, 1996, TPG had available approximately $103.6 million of
unrestricted funds. This amount has increased substantially from the December
31, 1995 amount due to the unused portion of the proceeds of the November debt
offering and receipt of the cash dividend from PMI, less the capital
contribution to RGC and funds used to repurchase common stock.
The principal sources of funds for PMI are premiums received on new and renewal
business, commissions on ceded business and reimbursement of losses from
reinsurers, and amounts earned from the investment of this cash flow. The
principal uses of funds by PMI are the payment of claims and related expenses,
reinsurance premiums, other operating expenses and dividends to TPG.
In the mortgage guaranty insurance industry, liquidity refers to the ability of
an enterprise to generate adequate amounts of cash from its normal operations,
including premiums received and investment income, in order to meet its
financial commitments, which are principally obligations under the insurance
policies it has written. Liquidity requirements are influenced significantly by
the level and severity of claims. PMI's claims-paying ability is currently rated
"AA+" (Very High) by Duff & Phelps Credit Rating Co., "AA+" (Very Strong) by
Fitch Investors Service, Inc., "Aa2" (Excellent) by Moody's Investors Service,
Inc. and "AA+" (Excellent) by Standard and Poor's Rating Services. These ratings
are subject to revisions or withdrawal at any time by the assigning rating
organization. The ratings by the organizations are based upon factors relevant
to PMI's policyholders and are not applicable to the Company's common stock or
outstanding debt. The Company's operations generally do not require significant
amounts of capital expenditures.
PMI generates substantial cash flows from operations as a result of premiums
being received in advance of the time when claim payments are required. Cash
flows generated from PMI's operating activities increased slightly to $96.7
million in 1996 from $93.2 million in 1995. These operating cash flows, along
with that portion of the investment portfolio that is held in cash and
highly-liquid securities, have historically met the liquidity requirements of
PMI, as evidenced by the growth in its investment portfolio. PMI's investment
portfolio, on a cost basis, was $1,054.8 million at December 31, 1996 compared
with $988.3 million at December 31, 1995.
PAGE 38 THE PMI GROUP, INC. AND SUBSIDIARIES
Consolidated reserve for losses and loss adjustment expenses increased from
$192.1 million at December 31, 1995, to $199.8 million at December 31, 1996, an
increase of $7.7 million, or 4.0%. The change in consolidated reserve for losses
and loss adjustment expense consisted of increases resulting primarily from the
Centre Re commutation and secondarily from the maturation of PMI's book of
business, offset by a decrease due to the acceleration of claim payments.
Consolidated shareholders' equity increased from $870.5 million at December 31,
1995, to $986.9 million at December 31, 1996, an increase of $116.4 million, or
13.4%. This increase consisted of $157.9 million of net income and $1.6 million
of employee stock options exercised, offset by common stock repurchases of $30.1
million, dividends declared of $7.0 million and a decrease of $6.0 million in
net unrealized gains on investments available for sale (net of tax).
PMI's risk-to-capital ratio at December 31, 1996 was 15.9:1 compared to 15.8:1
at December 31, 1995. Had the Centre Re commutation not occurred, PMI's
risk-to-capital ratio would have been approximately 14.9:1 at December 31,
1996.
CAUTIONARY STATEMENT
Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. The statements contained in this
document, including statements which are incorporated by reference, that are not
historical facts, and that relate to future plans, events or performance are
forward-looking statements. The Company's actual results may differ materially
from those expressed in any forward-looking statements made by the Company.
These forward-looking statements involve a number of risks or uncertainties
including, but not limited to, the factors set forth below.
Several factors such as economic recessions, falling housing values, rising
unemployment rates, deteriorating borrower credit, interest rate volatility,
legislation impacting borrowers' rights, or combinations of such factors might
affect the mortgage insurance industry in general and could materially and
adversely affect the Company's financial condition and results of operations.
Such economic events could materially and adversely impact the demand for
mortgage insurance, cause claims on policies issued by PMI to increase, and/or
cause a similar adverse increase in PMI's loss experience.
In addition to nationwide economic conditions, PMI could be particularly
affected by economic downturns in specific regions where a large portion of its
business is concentrated, particularly California where PMI has 22.0% of its
risk in force concentrated and where the default rate on all PMI policies in
force is 3.81% compared to 2.19% nationwide, as of December 31, 1996.
Several factors that may influence the amount of NIW by PMI include mortgage
insurance industry volumes of new business, the impact of competitive
underwriting criteria and products including mortgage pool insurance, the effect
of risk-sharing structured transactions, changes in the performance of the
financial markets, general economic conditions that affect the demand for or
acceptance of the Company's products, changes in government housing policy,
changes in the statutory charters, regulations and coverage requirements of
Government Sponsored Enterprises, banks and savings institutions, customer
consolidation and other risk factors listed from time to time in TPG's
Securities and Exchange Commission filings.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 39
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
POTENTIAL INCREASE IN CLAIMS
Mortgage insurance coverage generally cannot be canceled by PMI and remains
renewable at the option of the insured for the life of the loan. As a result,
the impact of increased claims from policies originated in a particular year
generally cannot be offset by premium increases on policies in force or
mitigated by nonrenewal of insurance coverage. There can be no assurance,
however, that the premiums charged will be adequate to compensate PMI for the
risks and costs associated with the coverage provided to its customers.
RECENT GROWTH; CHANGES IN COMPOSITION OF INSURANCE WRITTEN
The mortgage insurance industry has experienced a significant increase in NIW,
primarily as a result of historically low interest rates. Policies written by
PMI from January 1, 1991 through December 31, 1994 represent 55.4% of PMI's
insurance in force as of December 31, 1996. The majority of claims under PMI
policies have historically occurred during the third through the sixth years
after issuance of the policies. Thus, this substantial volume of PMI's business
is in its expected peak claims period, and management expects that the default
rate will rise in the future as such business continues through its expected
peak claims period. If actual claim frequency on such business significantly
exceeds expected claim frequency, the Company's financial condition and results
of operations could be materially and adversely affected.
The composition of PMI's NIW has included an increasing percentage of mortgages
with LTVs in excess of 90% and less than or equal to 95% ("95s"). At December
31, 1996, approximately 43.6% of PMI's risk in force consisted of 95s, which, in
PMI's experience, have had a claims frequency approximately twice that of
mortgages with LTVs equal to or less than 90% and over 85% ("90s"). PMI also
offers coverage for mortgages with LTVs in excess of 95% and up to 97% ("97s"),
which have even higher risk characteristics than 95s and greater uncertainty as
to pricing adequacy. PMI's NIW also includes adjustable rate mortgages ("ARMs"),
which, although priced higher, have risk characteristics that exceed the risk
characteristics associated with PMI's book of business as a whole. Although PMI
charges higher premium rates for loans which are ARMs and/or 95s and even higher
rates for 97s, the premiums earned on such products, and the associated
investment income, may ultimately prove to be inadequate to compensate for
future losses from such products.
LOSS RESERVES
PMI establishes loss reserves based upon estimates of the claim rate and average
claim amount, as well as the estimated costs, including legal and other fees, of
settling claims. Such reserves are based on estimates, which are regularly
reviewed and updated. There can be no assurance that PMI's reserves will prove
to be adequate to cover ultimate loss development on incurred defaults. The
Company's financial condition and results of operations could be materially and
adversely affected if PMI's reserve estimates are insufficient to cover the
actual related claims paid and expenses incurred.
COMPETITION; MARKET SHARE
Numerous factors bear on the relative position of the private mortgage insurance
industry versus government and quasi-governmental competition as well as the
competition of lending institutions which choose to remain uninsured or to
reinsure through affiliates. PMI's market share, as measured by NIW declined in
the fourth quarter of 1996, compared to the third quarter of 1996, due primarily
to PMI's decision not to offer mortage pool insurance. Management presently
anticipates that competitive pressures related to the availability of mortgage
pool insurance will continue to negatively impact market share during the first
half of 1997. The Company's financial condition and results of operation could
be materially and adversely affected by a continuing decline in its market
share.
TPG and PMI from time to time introduce new mortgage insurance products or
programs. The Company's financial condition and results of operations could be
materially and adversely affected if PMI or the Company experience delays in
introducing competitive new products and programs. In addition, for any
introduced product, there can be no assurance that such products or
PAGE 40 THE PMI GROUP, INC. AND SUBSIDIARIES
programs will be as profitable as the Company's existing products and programs.
FANNIE MAE AND FREDDIE MAC; STATE AND FEDERAL LEGISLATION
Fannie Mae and Freddie Mac impose requirements on private mortgage insurers for
such insurers to be eligible to insure loans sold to such agencies. Any change
in PMI's existing eligibility status could have a material adverse effect on
the Company's financial condition and results of operations.
Proposals have been advanced which would allow Fannie Mae and Freddie Mac
greater flexibility in utilizing substitutes for private mortgage insurance.
The Company cannot predict whether any such proposals will be adopted or, if
adopted, whether such proposals would materially and adversely affect the
Company's financial condition and results of operations.
PMI must cancel mortgage insurance for a mortgage loan upon the request of the
insured. Fannie Mae and Freddie Mac have recently adopted guidelines which give
borrowers the right to request cancellation of mortgage insurance when specified
conditions are met. In addition, federal legislation has been introduced that
also addresses these issues and various states have enacted or proposed similar
legislation. Proposals concerning borrower notification of their cancellation
rights, cancellation criteria, or the point at which mortgage insurance premiums
may no longer be charged to borrowers, are still being formulated and remain
uncertain. Although it is expected that certain of these proposals will
eventually be enacted, the Company believes it is too early to ascertain their
impact.
RISK-TO-CAPITAL RATIO
Regulators specifically limit the amount of insurance risk that may be written
by PMI to a multiple of 25 times PMI's statutory capital (which includes the
contingency reserve). Other factors affecting PMI's risk-to-capital ratio
include: (i) regulatory review and oversight by the State of Arizona, PMI's
state of domicile for insurance regulatory purposes; (ii) limitations under the
Runoff Support Agreement discussed below, which prohibit PMI from paying any
dividends if, after the payment of any such dividend, PMI's risk-to-capital
ratio would equal or exceed 23 to 1, (iii) TPG's credit agreements, and (iv)
TPG's and PMI's credit or claims-paying ability ratings.
Significant losses could cause a material reduction in statutory capital,
causing an increase in the risk-to-capital ratio and thereby limit PMI's ability
to write new business. The inability to write new business could materially
adversely affect the Company's financial condition and results of operations.
CONTINUING RELATIONSHIPS WITH ALLSTATE AND AFFILIATES
Historically, Allstate provided capital and other business support services to
PMI pursuant to a variety of contractual arrangements with PMI and TPG. Pursuant
to the Runoff Support Agreement with Allstate, if PMI's risk-to-capital ratio
exceeds 23 to 1, Allstate will have certain limited rights and obligations to
pay amounts with respect to claims under PMI policies in effect prior to the
effective date of the Runoff Support Agreement (or to contribute capital to TPG
or to PMI for such purpose). In 1993, PMI entered into a reinsurance agreement
with Forestview, a wholly-owned subsidiary of Allstate, whereby Forestview
agreed to reinsure all liabilities (net of amounts collected from third party
reinsurers) in connection with PMI's mortgage pool insurance business in
exchange for premiums received. In 1994, Forestview also agreed to assume PMI's
mortgage pool insurance business upon receipt of all required regulatory
approvals. Significant claims have been paid on the policies covered by the
reinsurance agreement which, amounts have been reimbursed by Forestview to PMI.
It is anticipated that additional significant claims will be paid in 1997 and
beyond.
Due to the complex nature of numerous arrangements between Allstate and the
Company, Allstate has the ability to influence the policies and affairs of the
Company. The failure of Allstate to maintain its contractual commitments to the
Company could have a material adverse impact on the Company's financial
condition and results of operations.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 41
CONSOLIDATED STATEMENTS OF
O P E R A T I O N S
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1996 1995 1994
- ---------------------------------------------------------------------------- -------------- --------------- ---------------
REVENUES Premiums earned $ 412,738 $ 328,756 $ 296,345
Investment income, less investment expense 67,442 62,041 56,774
Realized capital gains, net 14,296 11,934 3,064
Other income 6,948 2,309 3,802
-------------- --------------- ---------------
TOTAL REVENUES 501,424 405,040 359,985
-------------- --------------- ---------------
LOSSES AND Losses and loss adjustment expenses 152,409 112,837 103,907
EXPENSES Underwriting and other operating expenses 126,002 111,662 117,527
Interest expense 907 -- --
-------------- --------------- ---------------
TOTAL LOSSES AND EXPENSES 279,318 224,499 221,434
-------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 222,106 180,541 138,551
INCOME TAX EXPENSE 64,188 45,310 32,419
-------------- --------------- ---------------
NET INCOME $ 157,918 $ 135,231 $ 106,132
============== =============== ===============
INCOME PER
SHARE NET INCOME $ 4.51 $ 3.85 $ 3.03
============== =============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING 35,040 35,122 35,000
============== =============== ===============
See notes to consolidated financial statements
PAGE 42 THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
B A L A N C E S H E E T S
AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995
- ------------------------ ------------------------------------------------------------- --------------- ---------------------
ASSETS Investments
Available for sale, at market
Fixed income securities (amortized
cost $1,042,570 and $867,705) $ 1,085,514 $ 928,773
Equity securities
Common (cost $77,775 and $85,088) 112,583 110,843
Preferred (cost $305 and $438) 388 505
Common stock of affiliate, at underlying book value 11,385 10,541
Short-term investments 81,876 82,310
--------------- ---------------------
Total investments 1,291,746 1,132,972
Cash 6,592 3,654
Accrued investment income 19,439 18,367
Reinsurance recoverable and prepaid premiums 83,379 78,007
Receivable from affiliates 10,525 7,579
Receivable from Allstate 16,822 14,733
Deferred policy acquisition costs 31,633 22,986
Property and equipment, net 22,519 17,574
Other assets 27,264 8,568
--------------- ---------------------
TOTAL ASSETS $ 1,509,919 $ 1,304,440
=============== =====================
LIABILITIES Reserve for losses and loss adjustment expenses $ 199,774 $ 192,087
Unearned premiums 116,951 140,322
Long-term debt 99,342 --
Reinsurance balances payable 13,295 18,741
Deferred income taxes 50,786 52,130
Other liabilities and accrued expenses 42,909 30,657
--------------- ---------------------
TOTAL LIABILITIES 523,057 433,937
--------------- ---------------------
Commitments and contingent liabilities (Note 10) -- --
SHAREHOLDERS' Preferred stock - $.01 par value; 5,000,000 shares -- --
authorized
EQUITY Common stock - $.01 par value; 125,000,000 shares
authorized; 35,047,619 and 35,011,494 shares issued 350 350
Additional paid-in capital 258,059 256,507
Unrealized net gains on investments 50,709 56,761
Retained earnings 707,885 556,969
--------------- ---------------------
1,017,003 870,587
Less cost of treasury shares (537,800 and 2,000 shares
at cost) 30,141 84
--------------- ---------------------
TOTAL SHAREHOLDERS' EQUITY 986,862 870,503
--------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,509,919 $ 1,304,440
=============== =====================
See notes to consolidated financial statements.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 43
CONSOLIDATED STATEMENTS OF
S H A R E H O L D E R S' E Q U I T Y
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------------- ------------ ------------- -------------
PREFERRED Preferred stock - $.01 par value; 5,000,000 shares
STOCK authorized $ -- $ -- $ --
------------ ------------- -------------
COMMON Common stock - $.01 par value; 125,000,000 shares
STOCK authorized, 35,047,619, 35,011,494 and 35,000,000
shares issued 350 350 350
------------ ------------- -------------
ADDITIONAL Balance, beginning of year 256,507 256,163 198,163
PAID-IN Stock grants and exercise of stock options 1,552 344 --
CAPITAL Capital contributions from Allstate -- -- 58,000
------------ ------------- -------------
Balance, end of year 258,059 256,507 256,163
------------ ------------- -------------
UNREALIZED Balance, beginning of year 56,761 3,676 55,930
NET GAINS ON Change in unrealized net gains on investments (6,052) 53,085 (52,254)
------------ ------------- -------------
INVESTMENTS Balance, end of year 50,709 56,761 3,676
------------ ------------- -------------
RETAINED Balance, beginning of year 556,969 426,989 320,857
EARNINGS Net income 157,918 135,231 106,132
Dividends declared (7,002) (5,251) --
------------ ------------- -------------
Balance, end of year 707,885 556,969 426,989
------------ ------------- ------------
TREASURY Balance, beginning of year (84) -- --
STOCK Purchases of THE PMI Group, Inc. common stock (30,057) (84) --
------------ ------------- ------------
Balance, end or year (30,141) (84) --
------------ ------------- ------------
TOTAL SHAREHOLDERS' EQUITY $ 986,862 $ 870,503 $ 687,178
============ ============= ============
See notes to consolidated financial statements.
PAGE 44 THE PMI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
C A S H F L O W S
YEAR ENDED DECEMBER 31,
(IN THOUSANDS} 1996 1995 1994
- ------------------------------------------------------------------------------------ ------------- ------------ -------------
CASH Net income $ 157,918 $ 135,231 $ 106,132
FLOWS Reconciliation of net income to net cash provided by operating
FROM activities
OPERATING Realized capital gains, net (14,296) (11,934) (3,064)
ACTIVITIES Equity in (earnings) loss of affiliate (192) 605 448
Depreciation and amortization 3,283 5,155 4,905
Changes in
Reserve for losses and loss adjustment expenses 7,687 18,202 38,414
Unearned premiums (23,371) (16,699) (20,644)
Deferred policy acquisition costs (8,647) 2,616 3,412
Accrued investment income (1,072) (1,265) (1,178)
Reinsurance balances payable (5,446) 6,126 (153)
Reinsurance recoverable and prepaid premiums (5,372) (17,328) (14,240)
Income taxes 1,915 12,549 6,309
Receivable from affiliates (2,946) 12,330 (11,868)
Receivable from/payable to Allstate (2,089) (47,111) 3,988
Other (5,566) 1,554 3,192
------------- ------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 101,806 100,031 115,653
------------- ------------ -------------
CASH Proceeds from sales of equity securities 97,104 56,163 29,844
FLOWS Investment collections of fixed-income securities 32,595 67,697 60,784
FROM Proceeds from sales of fixed-income securities 211,945 -- --
INVESTING Investment purchases
ACTIVITIES Fixed-income securities (415,162) (168,641) (136,036)
Equity securities (77,634) (56,078) (43,042)
Net (increase) decrease in short-term investments 434 4,700 (72,164)
Purchase of common stock of affiliate -- -- (9,299)
Investment in affiliate (1,350) (1,848) --
Purchase of property and equipment (10,213) (6,368) (8,723)
------------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (162,281) (104,375) (178,636)
------------- ------------ -------------
CASH Issuance of long-term debt 99,337 -- --
FLOWS Proceeds from exercise of stock options 1,135 170 --
FROM Dividends paid to shareholders (7,002) (3,500) --
FINANCING Purchases of The PMI Group, Inc. common stock (30,057) (84) --
ACTIVITIES Capital contributions from Allstate -- -- 58,000
------------- ------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 63,413 (3,414) 58,000
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH 2,938 (7,758) (4,983)
CASH AT BEGINNING OF YEAR 3,654 11,412 16,395
------------- ------------ -------------
CASH AT END OF YEAR $ 6,592 $ 3,654 $ 11,412
============= ============ =============
See notes to consolidated financial statements
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 45
[Blank Page]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
NOTE 1. BASIS OF PRESENTATION
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of The PMI Group, Inc. ("TPG"), its wholly owned
subsidiaries, PMI Mortgage Insurance Co. ("PMI"), Residential Guaranty Co.
("RGC"; formerly PMI Reinsurance Co.), American Pioneer Title Insurance Company
("APTIC") and PMI Mortgage Guaranty Co. ("PMG"), and PMI's wholly owned
subsidiaries PMI Mortgage Services Co. ("MSC") and PMI Securities Co.,
collectively referred to as the "Company". All material intercompany
transactions and balances have been eliminated in consolidation.
FORMATION OF COMPANY. TPG was incorporated in December 1993. After obtaining the
required regulatory approvals, on November 28, 1994, Allstate Insurance Company
("Allstate") contributed all of the outstanding common stock of PMI to TPG.
Allstate had previously been the direct owner of all of the common stock of PMI.
Allstate is a wholly owned subsidiary of The Allstate Corporation ("Allstate
Corp.").
On April 18, 1995, Allstate, which had been the sole shareholder of the Company,
sold 24.5 million shares of the Company's common stock, representing 70% of the
outstanding shares of common stock, for approximately $784.0 million (net of
related underwriting discount) in an underwritten public offering registered
under the Securities Act of 1933. Concurrent with the stock offering, Allstate
Corp. sold a new issue of 6.76% exchangeable notes due in 1998. The notes are
mandatorily exchangeable at maturity into substantially all of the remaining
outstanding shares of the common stock of the Company owned by Allstate after
completion of the public offering (subject to Allstate Corp.'s right to deliver
cash in lieu of such shares). As a result, Allstate Corp. will continue to own,
directly or indirectly, 30% of the Company's common stock until the notes are
exchanged, at which time Allstate's ownership could be significantly reduced or
eliminated.
In connection with the public offering of the Company's common stock, the
Company increased the number of shares of common stock outstanding to 35 million
through a stock split effected as a stock dividend on February 27, 1995.
Accordingly, earnings per share has been calculated based on 35 million shares
outstanding for 1994.
NOTE 2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. The Company, through PMI, primarily writes residential mortgage
guaranty insurance ("primary insurance"). In addition, the Company writes title
insurance through APTIC. Primary insurance provides protection to mortgage
lenders against losses in the event of borrower default and assists lenders in
selling mortgage loans in the secondary market. Title insurance protects the
insured party against losses resulting from title defects, liens and
encumbrances existing as of the effective date of the policy.
BASIS OF ACCOUNTING. The financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which vary from statutory
accounting practices prescribed or permitted by insurance regulatory authorities
(see Note 12). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INVESTMENTS. The Company has designated its entire portfolio of fixed-income and
equity securities as available for sale. Such securities are carried at market
value with unrealized gains and losses, net of deferred income taxes, reported
as a separate component of shareholders' equity.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
In September 1994, PMI acquired 45% of the common stock of CMG Mortgage
Insurance Company ("CMG") from CUNA Mutual Investment Corp. ("CMIC"). CMIC
continues to own the remaining 55% of the common stock of CMG. Such affiliated
investment is reported in accordance with the equity method of accounting.
Investment income consists primarily of interest and dividends. Interest is
recognized on an accrual basis and dividends are recorded on the date of
declaration. Realized capital gains and losses are determined on a
specific-identification basis.
PROPERTY AND EQUIPMENT. Property and equipment (including software) is carried
at cost less accumulated depreciation. The Company provides for depreciation
utilizing the straight-line method over the estimated useful lives of the
assets, generally 3 to 10 years for equipment and 40 years for real property.
Accumulated depreciation on property and equipment was $28.0 million and $23.2
million at December 31, 1996 and 1995, respectively.
INSURANCE ACCOUNTING. Primary insurance policies are contracts that are
non-cancelable by the insurer, are renewable at a fixed price at the insured's
option, and provide for the payment of premiums on a single, annual or monthly
payment basis. Upon renewal by the insured, the Company is not able to re-
underwrite or re-price its policies. Premiums written on a single premium and an
annual premium basis are initially deferred as unearned premiums and earned over
the policy term. Premiums written on policies covering more than one year
(single premium plans) are amortized over the policy life in relation to the
expiration of risk. Premiums written on annual payment policies are earned on a
monthly pro-rata basis. Premiums written on monthly payment policies are earned
in the period to which they relate. Title insurance premiums are recognized as
revenue on the effective date of the title insurance policy. Fee income of the
non-insurance subsidiaries is earned as the services are provided.
Certain costs of acquiring insurance business, including compensation, premium
taxes and other underwriting expenses, are deferred, to the extent recoverable,
and amortized to expense as the related premiums are earned. Policy acquisition
costs amortized to expense in the years ended December 31, 1996, 1995 and 1994
were $48.3 million, $52.9 million and $48.1 million, respectively.
The reserve for losses and loss adjustment expenses is the estimated cost of
settling claims related to notices of default on insured loans that have been
reported to the Company as well as loan defaults that have occurred but have not
been reported. Estimates are based on an evaluation of claim rates, claim
amounts, and salvage recoverable. Reserves for title insurance claims are based
on estimates of the amounts required to settle such claims, including expenses
for defending claims for which notice has been received and an amount estimated
for claims not yet reported.
Management believes that the reserve for losses and loss adjustment expenses at
December 31, 1996 is appropriately established in the aggregate and is adequate
to cover the ultimate net cost of reported and unreported claims arising from
losses which had occurred by that date. The establishment of appropriate
reserves is an inherently uncertain process. Such reserves are necessarily based
on estimates and the ultimate net cost may vary from such estimates. These
estimates are regularly reviewed and updated using the most current information
available. Any resulting adjustments, which may be material, are reflected in
current operations.
INCOME TAXES. The Company accounts for income taxes using the liability method,
whereby deferred tax assets and liabilities are recorded based on the difference
between the financial statement and tax bases of assets and liabilities at the
currently enacted tax rates. The principal assets and liabilities giving rise to
such differences are presented in Note 6.
CONCENTRATION OF RISK. A substantial portion of PMI's business is generated
within the state of California. Of new insurance written for the year ended
December 31, 1996, California accounted for 20.7%. Also, at December 31, 1996,
California's book of business represented 22.0% of total risk in force.
PAGE 48 THE PMI GROUP, INC. AND SUBSIDIARIES
STOCK-BASED COMPENSATION. The Company accounts for stock-based awards to
employees and directors using the intrinsic value method in accordance with
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees (see Note 11).
RECLASSIFICATION. Certain prior year amounts have been reclassified to conform
to current year presentation.
NOTE 3. INVESTMENTS
MARKET VALUES. The amortized cost and estimated market values for fixed-income securities are shown below (in thousands):
GROSS UNREALIZED
AMORTIZED ---------------- MARKET
COST GAINS (LOSSES) VALUE
------------- ------------- ------------- --------------
At December 31, 1996
U. S. government and agencies $ 89,131 $ 588 $ (1,129) $ 88,590
Municipals 831,213 48,021 (4,233) 875,001
Corporate bonds 121,990 424 (749) 121,665
Redeemable preferred stock 236 22 -- 258
------------- ------------- ------------- --------------
Total $ 1,042,570 $ 49,055 $ (6,111) $ 1,085,514
============= ============= ============= ==============
At December 31, 1996
U. S. government and agencies $ 5,302 $ 877 $ -- $ 6,179
Municipals 861,634 61,256 (1,083) 921,807
Redeemable preferred stock 769 18 -- 787
------------- ------------- ------------- --------------
Total $ 867,705 $ 62,151 $ (1,083) $ 928,773
============= ============= ============= ==============
SCHEDULED MATURITIES. The scheduled maturities for fixed-income securities were as follows at December 31, 1996 (in thousands):
AMORTIZED MARKET
COST VALUE
------------- --------------
Due in one year or less $ 37,484 $ 38,017
Due after one year through five years 254,572 265,367
Due after five years through ten years 209,967 217,102
Due after ten years through twenty years 460,269 482,443
Due after twenty years 80,278 82,585
------------- --------------
Total $ 1,042,570 $ 1,085,514
============= ==============
Actual maturities may differ from those scheduled as a result of calls by the issuers prior to maturity.
INVESTMENT CONCENTRATION AND OTHER ITEMS. The Company maintains a diversified
portfolio of municipal bonds. At December 31, the following states represented
the largest concentrations in the portfolio (expressed as a percentage of the
carrying value of all municipal bond holdings).
Holdings in no other state exceed 5.0% of the portfolio at December 31 for the
respective years.
1996 1995
---- ----
Texas 17.3% 17.4%
Illinois 14.2 15.7
Washington 10.4 9.2
Indiana 10.0 10.0
California 9.4 7.2
Massachusetts 5.3 3.5
Pennsylvania 3.9 5.0
At December 31, 1996, fixed-income securities with a market value of $9.7
million were on deposit with regulatory authorities as required by law.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
UNREALIZED NET GAINS ON INVESTMENTS.
Unrealized net gains on investments included in shareholders' equity at December 31, 1996, are as follows (in thousands):
GROSS UNREALIZED NET
MARKET ------------------------ UNREALIZED
COST VALUE GAINS (LOSSES) GAINS
----------- ----------- --------- ---------- ----------
Fixed income securities $ 1,042,570 $ 1,085,514 $ 49,055 $ (6,111) $ 42,944
Common stocks 77,775 112,583 35,588 (779) 34,809
Preferred stocks 305 388 82 -- 82
Investment in affiliate 11,200 11,385 185 -- 185
----------- ----------- -------- --------- --------
Total $ 1,131,850 $ 1,209,870 $ 84,910 $ (6,890) 78,020
=========== =========== ======== ========= 27,311
Less deferred income taxes --------
Total $ 50,709
========
The difference between cost and market value of the investment in affiliate
reflects net unrealized gains on the affiliate's investment portfolio. The
stated market value does not necessarily represent the fair value of the
affiliate's common stock held by the Company.
The change in net unrealized gains, net of deferred income taxes, for fixed
income securities and equity securities are as follows (in thousands):
1996 1995 1994
---------- -------- ---------
Fixed income securities $ (11,777) $ 42,065 $ (49,976)
Equity securities 5,895 10,729 (2,278)
Investment in affiliate (170) 291 --
---------- -------- ---------
Total $ (6,052) $ 53,085 $ (52,254)
========== ======== =========
INVESTMENT INCOME. Investment income by investment type is as follows (in
thousands):
1996 1995 1994
-------- -------- --------
Fixed income securities $ 63,715 $ 56,259 $ 52,921
Equity securities 2,136 2,625 2,117
Common stock of affiliate 192 (605) (448)
Short-term 2,119 5,030 3,226
-------- -------- --------
Investment income, before expenses 68,162 63,309 57,816
Less investment expense 720 1,268 1,042
-------- -------- --------
Investment income, less investment expense $ 67,442 $ 62,041 $ 56,774
======== ======== ========
REALIZED CAPITAL GAINS AND LOSSES. Net realized capital gains on investments are
as follows (in thousands):
1996 1995 1994
-------- -------- --------
Fixed income securities $ 2,072 $ 1,381 $ 1,282
Equity securities 12,024 10,555 1,786
Short-term 200 (2) (4)
-------- -------- --------
Realized capital gains -- net, before taxes 14,296 11,934 3,064
Less income taxes 5,004 4,177 1,072
-------- -------- --------
Realized capital gains, net of taxes $ 9,292 $ 7,757 $ 1,992
======== ======== ========
Gross realized capital gains and losses on investments are as follows (in
thousands):
1996 1995 1994
---- ---- ----
Gross realized capital gains $ 19,842 $ 13,306 $ 4,793
Gross realized capital losses (5,546) (1,372) (1,729)
-------- -------- -------
Net realized capital gains $ 14,296 $ 11,934 $ 3,064
======== ======== =======
PAGE 50 THE PMI GROUP, INC. AND SUBSIDIARIES
NOTE 4. LOSS RESERVES
The following table is a reconciliation of the beginning and ending reserve for
losses and loss adjustment expenses for each of the last three years (in
thousands):
1996 1995 1994
---- ---- ----
Balance, January 1 $ 192,087 $ 173,885 $ 135,471
Less reinsurance recoverable 17,899 17,569 12,649
------------- -------------- -------------
Net balance, January 1 174,188 156,316 122,822
------------- -------------- --------------
Losses and loss adjustment expenses, principally in respect
of defaults occurring in
Current year 161,740 133,536 121,464
Prior years (9,331) (20,699) (17,557)
------------- -------------- -------------
Total losses and loss adjustment expenses 152,409 112,837 103,907
------------- -------------- --------------
Losses and loss adjustment expense payments, principally
in respect of defaults occurring in
Current year 23,353 16,180 13,651
Prior years 108,757 78,785 56,762
------------- -------------- -------------
Total payments 132,110 94,965 70,413
------------- -------------- -------------
Net balance, December 31 194,487 174,188 156,316
Plus reinsurance recoverable 5,287 17,899 17,569
------------- -------------- -------------
Balance, December 31 $ 199,774 $ 192,087 $ 173,885
============= ============== ==============
As a result of changes in estimates of ultimate losses resulting from insured
events in prior years, the provision for losses and loss adjustment expenses
(net of reinsurance recoverable) decreased by $9.3 million, $20.7 million and
$17.6 million in 1996, 1995 and 1994, respectively, due primarily to
lower-than-anticipated losses in California. Such re-estimates were based on
management's analysis of various economic trends (including the real estate
market and unemployment rates) and their effect on recent claim rate and claim
severity experience.
NOTE 5. REINSURANCE
PMI cedes reinsurance to reduce net risk in force to meet regulatory
risk-to-capital requirements and to comply with the regulatory maximum policy
coverage percentage limitation of 25%. Certain of the Company's reinsurance
arrangements have adjustable features, including experience account refunds,
which depend on the loss experience of the underlying business. While such
estimates are based on the Company's actuarial analysis of the applicable
business, the amounts the Company will ultimately recover could differ
materially from amounts recorded in reinsurance recoverable. Reinsurance ceding
arrangements do not discharge the Company from its obligations as the primary
insurer.
Effective December 31, 1996 PMI terminated and commuted its reinsurance
agreement with Centre Reinsurance Company of New York and Centre Reinsurance
International Company. This commutation did not have a significant impact on the
Company's results of operations.
In December 1993, the Company decided to cease
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
writing new business in its mortgage pool insurance business segment (except for
honoring certain commitments in existence prior to the discontinuation of this
business). Concurrently, the Company entered into a reinsurance agreement with
Forestview Mortgage Insurance Co. ("Forestview"), a wholly owned subsidiary of
Allstate, to cede all future mortgage pool net premiums and net losses from PMI
to Forestview. As a result of this ceding agreement, the pool business had no
significant impact on the Company's results of operations for the years ended
December 31, 1996, 1995 and 1994. The Board of Directors of Allstate has
resolved that Allstate will make capital contributions to Forestview as
necessary to maintain Forestview's risk-to-capital ratio below 20.0 to 1. In
accordance with accounting for discontinued operations, pool insurance assets
(unpaid losses recoverable and paid claims receivable from reinsurers) and
liabilities (loss reserves and premiums payable) have been netted in the
accompanying consolidated balance sheets, resulting in a net receivable from
reinsurers of $12.4 million and $4.8 million at December 31, 1996 and 1995,
respectively. Gross pool reinsurance recoverables and receivables from
Forestview and other reinsurers are as follows at December 31 (in thousands):
1996 1995
---- ----
Forestview 140,670 123,768
Other reinsurers 39,322 53,135
------- -------
Total 179,992 176,903
======= =======
Reinsurance recoverable on paid primary losses from non-affiliated reinsurers
was $5.3 million and $2.2 million at December 31, 1996 and 1995, respectively.
Prepaid primary reinsurance premiums from non-affiliated reinsurers were $3.8
million and $17.4 million at December 31, 1996 and 1995, respectively.
The effects of reinsurance on the primary premiums written, premiums earned and
losses and loss adjustment expenses of the Company's operations for the year
ending December 31 are as follows (in thousands):
1996 1995 1994
---- ---- ----
Premiums written
Direct $ 404,528 $ 335,632 $ 301,015
Assumed (901) 3,010 3,819
Ceded (607) (24,621) (27,087)
----------- ----------- ------------
Premiums written, net of reinsurance $ 403,020 $ 314,021 $ 277,747
=========== =========== ============
Premiums earned
Direct $ 425,831 $ 352,459 $ 321,477
Assumed 634 3,412 4,001
Ceded (13,727) (27,115) (29,133)
----------- ----------- ------------
Premiums earned, net of reinsurance $ 412,738 $ 328,756 $ 296,345
=========== =========== ============
Losses and loss adjustment expenses
Direct $ 157,203 $ 128,607 $ 117,672
Assumed (267) 499 778
Ceded (4,527) (16,269) (14,543)
----------- ----------- ------------
Losses and loss adjustment expenses, net of reinsurance $ 152,409 $ 112,837 $ 103,907
=========== =========== ============
NOTE: In the first quarter of 1996 a quota share reinsurance assumption
agreement with Triad Guaranty Insurance Corporation was terminated.
PAGE 52 THE PMI GROUP, INC. AND SUBSIDIARIES
NOTE 6. INCOME TAXES
The components of income tax expense are as follows (in thousands):
1996 1995 1994
---- ---- ----
Current $ 9,056 $ 10,513 $ 2,842
Deferred 55,132 34,797 29,577
---------------- --------------- ----------------
Total income tax expense $ 64,188 $ 45,310 $ 32,419
================ =============== ================
A reconciliation of the statutory federal income tax rate to the effective tax
rate reported on income from operations before taxes is as follows:
1996 1995 1994
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (7.1) (9.5) (11.9)
State income tax (net) 0.9 0.4 0.2
Other 0.1 (0.8) 0.1
--- ---- ---
Effective income tax rate 28.9% 25.1% 23.4%
==== ==== ====
On April 10, 1995 the Company and its subsidiaries separated from Allstate (See
Note 1). Effective April 11, 1995 the Company and its subsidiaries file a
consolidated income tax return. Prior to that date the Company was part of the
consolidated return of Sears, Roebuck and Co. ("Sears"), the former parent
company of Allstate Corp. The Company's share of consolidated federal income tax
liability prior to April 11, 1995 was determined under a tax sharing agreement
as part of the Sears tax group. Under the tax sharing agreement, the Company has
continuing rights and obligations to Allstate and Sears for the tax effect of
any changes in taxable income relating to the periods during which the Company
was part of the Sears tax group. At December 31, 1996 the Company had income
taxes receivable of $16.8 million from Allstate related to the filing of an
amended return for prior years.
Section 832(e) of the Internal Revenue Code permits mortgage guaranty insurers
to deduct, within certain limitations, additions to statutory contingency
reserves (see Note 12). This provision was enacted to enable mortgage guaranty
insurers to increase statutory unassigned surplus through the purchase of
non-interest bearing "tax and loss bonds" from the federal government. The tax
and loss bonds purchased are limited to the tax benefit of the deduction for
additions to the contingency reserves. The Company purchased tax and loss bonds
of $50.4 million, $21.2 million and $19.3 million in 1996, 1995 and 1994,
respectively.
The Company paid income taxes of $8.2 million, $28.4 million and $9.4 million in
1996, 1995 and 1994, respectively. Included in these amounts are federal income
tax payments to Allstate under the tax sharing agreement of $0.7 million, $21.2
million and $8.6 million in 1996, 1995 and 1994, respectively.
The components of the deferred income tax assets and liabilities at December 31
are as follows (in thousands):
1996 1995
---- ----
Deferred tax assets
Discount on loss reserves $ 3,722 $ 3,831
Unearned premium reserves 8,187 9,823
Alternative minimum tax credit carryforward 10,453 10,026
Pension costs 2,586 1,724
Other assets 4,258 3,217
----------- -----------
Total deferred tax assets 29,206 28,621
----------- -----------
Deferred tax liabilities
Statutory contingency reserves (36,435) (30,405)
Policy acquisition costs (11,072) (8,045)
Unrealized net gains on investments (27,311) (30,577)
Reinsurance -- (7,751)
Other liabilities (5,174) (3,973)
----------- -----------
Total deferred tax liabilities (79,992) (80,751)
----------- -----------
Net deferred tax liability $ (50,786) $ (52,130)
=========== ===========
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
NOTE 7. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. Carrying value approximates
fair value for all financial assets and liabilities at December 31, 1996 and
1995. A number of the Company's significant assets and liabilities, including
deferred policy acquisition costs, property and equipment, deferred income taxes
and loss reserves, are not considered financial instruments.
NOTE 8. BENEFIT PLANS
PENSION PLANS
As of April 18, 1995 all full-time employees and certain part-time employees of
the Company participate in The PMI Group, Inc. Retirement Plan (the "Plan"), a
noncontributory defined benefit plan. Also, employees earning in excess of
$150,000 per year participate in The PMI Group, Inc. Supplemental Employee
Retirement Plan ("SERP"), a noncontributory defined benefit plan. Prior to April
18, 1995 the Company participated in the Allstate retirement plan ("Allstate
Plan"), which was also a noncontributory defined benefit plan. Benefits under
all three plans are based upon the employee's length of service, average annual
compensation and estimated social security retirement benefits. Pension expense
of $0.6 million and $2.6 million for the years ended December 31, 1995, and
1994, respectively, was allocated to the Company from the Allstate Plan based
upon compensation. Information about the components of net periodic pension
expense and the Allstate Plan's funded status is not available on a separate
company basis.
The components of the net periodic cost of the Company's defined benefit pension
plans for the year ended December 31, 1996 and the period April 18, 1995,
through December 31, 1995, are as follows (in thousands):
1996 1995
- ----------------------------------------------------------------- ----------------- ----------------
Service cost $3,282 $2,003
Interest on projected benefit obligation 484 175
Actual return on plan assets (219) (4)
Net amortization and deferral 78 10
----------------- ----------------
Net periodic pension cost $3,625 $2,184
================= ================
The following lists the funded status of the pension plan as of December 31,
1996 and 1995 (in thousands):
1996 1995
- ----------------------------------------------------------------- ----------------- ----------------
Actuarial present value of benefit obligations
Vested $3,399 $1,991
Non-vested 1,370 842
----------------- ----------------
Accumulated benefit obligation $4,769 $2,833
================= ================
Projected benefit obligation $6,658 $3,596
Net assets available for benefits 2,896 1,097
----------------- ----------------
Projected benefit obligation in excess of plan assets 3,762 2,499
Unrecognized net gain (loss) 581 (67)
----------------- ----------------
Net pension liability $4,343 $2,432
================= ================
The Company has accrued for the $4.3 million pension obligation as of December
31, 1996. The discount rates used in determining the actuarial present value of
the projected benefit obligation and the pension expense were 7.5% and 7.0% for
1996 and 1995, respectively. The expected long-term rate of return on plan
assets and the assumed rate of compensation increase was 8.5% and 5.5%,
respectively, for both 1996 and 1995. Plan assets consist of fixed income and
equity securities.
The Company provides certain health care and life insurance benefits for retired
employees ("OPEB Plan"). Generally, qualified employees may become eligible for
these benefits if they retire in accordance with the Company's established
retirement policy and are continuously insured under
PAGE 54 THE PMI GROUP, INC. AND SUBSIDIARIES
the Company's group plans or other approved plans for 10 or more years prior to
retirement. The Company shares the cost of the retiree medical benefits with
retirees based on years of service with the Company's share being subject to a
5% limit on annual medical cost inflation after retirement. The Company's post-
retirement benefit plans currently are not funded. The Company has the right to
modify or terminate these plans.
The components of the net periodic post-retirement benefit cost of the Company's
OPEB Plan for the year ended December 31, 1996 and the period April 18, 1995,
through December 31, 1995, are as follows (in thousands):
1996 1995
---- ----
Service cost $ 438 $ 226
Interest on projected benefit obligation 235 124
------------ ------------
Net periodic post-retirement benefit cost $ 673 $ 350
============ ============
The following lists the funded status of the OPEB Plan as of December 31, 1996
and 1995 (in thousands):
1996 1995
---- ----
Actuarial present value of
benefit obligations
Active employees eligible to retire $ 216 $122
Active employees ineligible to retire 2,566 2,728
------------ -----
Total accumulated post-retirement benefit
obligation 2,782 2,850
Less unrecognized prior service cost 304 333
Unrecognized (gains) losses (535) 180
------------ ------------
Accrued post-retirement benefit obligation $ 3,013 $ 2,337
============ ===============
The discount rates for the beginning of the period were 7.0% and 7.5% for 1996
and 1995, respectively. The discount rates used at the end of the period were
7.5% and 7.0% in 1996 and 1995, respectively, which reflects the changes in
high-quality investment-grade bond yields over the periods. The assumed health
care trend rate used in measuring the accumulated post-retirement benefit
obligation is 10.5% grading down to 5.0% over nine years. The effect of a one
percentage point increase in the health care trend rate assumption would result
in an increase of 23% in the accumulated post-retirement benefit obligation from
$2.8 million to $3.4 million as of December 31, 1996.
SAVINGS AND PROFIT SHARING PLAN
As of April 18, 1995, employees of the Company were eligible to participate in
The PMI Group, Inc. Savings and Profit Sharing Plan ("PMI Plan") covering both
salaried and hourly employees. Eligible employees who participate in the PMI
Plan receive, within certain limits, matching Company contributions. Costs
relating to the PMI Plan amounted to $1.1 million and $0.8 million for 1996 and
1995, respectively.
NOTE 9. DEBT AND CREDIT FACILITIES
LONG-TERM DEBT
On November 15, 1996, the Company issued debt securities in the amount of $100.0
million (the "Notes"). The Notes are unsecured, no sinking fund is provided and
the Notes are not redeemable prior to maturity. The Notes mature and are payable
on November 15, 2006. Interest on the Notes is 6.75% and is payable
semiannually. No interest payments were made during 1996.
LINES OF CREDIT
On February 1 and 13, 1996, the Company executed separate line of credit
agreements (the "Lines"), each in the amount of $25.0 million. The Lines have
final maturities of January 2001 and December 2000 and commitment fees of 8.0
and 6.5 basis points, respectively. Both Lines may be used for general corporate
purposes. There were no amounts outstanding on the Lines as of December 31,
1996. Interest paid on the Lines was $126,000 in the year ended December 31,
1996.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company leases certain office facilities and equipment. Minimum rental
commitments under non-cancelable operating leases with a remaining term of more
than one year as of December 31, 1996, are as follows (in thousands):
Year ending December 31:
1997 $ 5,750
1998 4,708
1999 2,936
2000 465
2001 145
-------------
Total $ 14,004
=============
Total rent expense for all leases was $7.4 million, $6.2 million and $4.8
million in 1996, 1995 and 1994, respectively.
LEGAL PROCEEDINGS
Various legal actions and regulatory reviews are currently pending that involve
the Company and specific aspects of its conduct of business. In the opinion of
management, the ultimate liability in one or more of these actions is not
expected to have a material effect on the financial condition or results of
operations of the Company.
NOTE 11. DIVIDENDS AND SHAREHOLDERS' EQUITY
DIVIDENDS
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company, receipt of dividends from PMI and
other relevant factors. PMI's ability to pay dividends to TPG is limited under
Arizona law. The payment of dividends by PMI without the prior approval of the
Arizona state insurance department is limited to formula amounts based on net
income, net investment income, and capital and surplus, including unassigned
surplus, determined in accordance with statutory accounting practices, as well
as the timing and amount of dividends paid in the preceding twelve months.
Limitations on PMI's risk-to-capital ratio also effectively limit PMI's ability
to pay dividends because the payment of dividends reduces statutory capital.
Various state regulatory authorities impose a limitation that the risk-to-
capital ratio may not exceed 25 to 1. In addition, under a certain support
agreement with Allstate, PMI is prohibited from paying any dividend that would
cause its risk-to-capital ratio to equal or exceed 23 to 1 (see Note 14). Under
the most restrictive dividend limitations, the maximum amount of dividends that
PMI can distribute to TPG at December 31, 1996, without prior regulatory
approval is $30.7 million. PMI's dividend restrictions have not had, and are not
expected to have, an impact on TPG's ability to meet its cash obligations.
PREFERRED STOCK
The Company's restated certificate of incorporation authorizes the Board of
Directors to issue up to 5,000,000 shares of preferred stock of TPG in classes
or series and to fix the designations, preferences, qualifications, limitations
or restrictions of any class or series with respect to the rate and nature of
dividends, the price and terms and conditions on which shares may be redeemed,
the amount payable in the event of voluntary or involuntary liquidation, the
terms and conditions for conversion or exchange into any other class or series
of the stock, voting rights and other terms. The Company may issue, without the
approval of the holders of common stock, preferred stock which has voting,
dividend or liquidation rights superior to the common stock and which may
adversely affect the rights of holders of common stock.
Pursuant to the Runoff Support Agreement (see Note 14), the Company has agreed
that, in the event that Allstate makes a payment contemplated by the Allstate
Support Agreements or the Runoff Support Agreement, Allstate will have the right
to receive preferred stock of TPG or PMI with a liquidation preference equal to
the amount of such payment. Such preferred stock will rank senior in right of
payment to the issuer's common stock and, so long as such preferred stock is
outstanding, the issuer thereof will be prohibited from paying any dividends or
making any other distributions on its common stock.
PAGE 56 THE PMI GROUP, INC. AND SUBSIDIARIES
EQUITY INCENTIVE PLAN AND DIRECTORS PLAN
During 1996, the Company amended and restated The PMI Group, Inc. Equity
Incentive Plan (the "Equity Incentive Plan") and The PMI Group, Inc. Stock Plan
for Non-Employee Directors (the "Directors Plan"). Pursuant to such plans, an
aggregate of 1,500,000 shares of common stock was reserved for issuance to
Directors, officers and, employees of TPG and its subsidiaries. The Equity
Incentive Plan provides for awards of both non-qualified stock options and
incentive stock options, stock appreciation rights, restricted stock subject to
forfeiture and restrictions on transfer, and performance awards entitling the
recipient to receive cash or common stock in the future following the attainment
of performance goals determined by the Board of Directors. Generally, options
are granted with an exercise price equal to the market value on the date of
grant, expire ten years from the date of grant and have a three year vesting
period. The Directors Plan provides that each director who is not an employee of
the Company or any of its subsidiaries ("Non-Employee Director") will receive an
annual grant of up to 300 shares of common stock and will receive stock options
for 1,500 shares annually, after an initial option of up to 3,000 shares. The
shares will be granted on June 1 of each year or as soon as administratively
practicable after each anniversary of the Director's commencement of service.
The following is a summary of activity in the Equity Incentive Plan and the
Directors Plan during 1996 and 1995:
1996 1995
------------------------------------- ------------------------------------
SHARES WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE UNDER OPTION EXERCISE PRICE
------------- ----------------- -------------- -----------------
Options outstanding at the
beginning of year 487,181 $ 33.96 -- $ --
Options granted 105,100 45.73 520,617 33.96
Options exercised (33,526) 33.85 (5,494) 31.18
Options forfeited (20,151) 33.95 (27,942) 33.97
------- ----- ------- -----
Outstanding at end of year 538,604 $ 36.40 487,181 $ 33.96
======= ====== ======= =====
Weighted average remaining
contractual life (in years) 8.3 $32.14 - $56.37 9.4 $32.14 - $34.00
Exercisable at year end 147,031 33.55 21,859 32.12
Reserved for future grants 916,376 1,001,325
As discussed in Note 2, the Company accounts for stock-based compensation under
APB No. 25 and its related interpretations. Accordingly, no compensation cost
has been recognized for the Equity Incentive Plan and the Directors Plan.
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation requires the disclosure of pro-forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal year 1995. Under SFAS No. 123, the fair value of stock based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly effect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: dividend yield range of .35% to .44% for
the 1996 options and .42% for the 1995 options; expected volatility range of
21.08% to 23.12% for the 1996 options and 24.38% for the 1995 options; risk free
interest rates of 5.40%, 5.83%, 6.51%, 6.53% and 6.54% for the 1996 options and
6.11% and 6.85% for the 1995 options; and an expected life of four years
following vesting. Forfeitures are recognized as they occur. If the computed
fair values of the 1996 and 1995 awards had been amortized to expense over the
vesting period of the awards, the Company's net income would have been reduced
to the pro forma amounts of $156.7 million and $134.3 million in 1996 and 1995,
respectively, resulting in pro forma earnings per share of $4.47 and $3.82,
respectively.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
NOTE 12. STATUTORY ACCOUNTING
The following table reconciles consolidated shareholders' equity at December 31,
1996 and 1995, and net income for each of the three years in the period ended
December 31, 1996 as reported under GAAP to PMI statutory capital and
policyholders' surplus and net income, determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory authorities
(in thousands):
PMI's statutory capital and policyholders' surplus: 1996 1995
---- ----
Consolidated shareholders' equity as reported under GAAP $ 986,862 $ 870,503
Less non-PMI shareholder's equity 50,529 32,457
---------- ---------
PMI shareholder's equity as reported under GAAP 936,333 838,046
Deferred policy acquisition costs (31,633) (22,986)
Deferred income taxes 37,643 32,052
Net unrealized gains on fixed-income securities, net of tax (30,149) (41,774)
Nonadmitted assets (6,153) (16,172)
Tax and loss bonds 90,976 40,540
Post-retirement benefits 4,552 3,193
Investment in subsidiaries (12,893) (8,703)
Other (201) (40)
--------- ---------
PMI statutory capital 988,475 824,156
Contingency reserve (674,841) (530,874)
--------- ---------
PMI statutory policyholders' surplus $ 313,634 $ 293,282
========= =========
PMI's statutory net income: 1996 1995 1994
---- ---- ----
Consolidated net income as reported under GAAP $157,918 $135,231 $106,132
Less non-PMI net income 7,557 2,195 1,597
-------- -------- --------
PMI net income as reported under GAAP 150,361 133,036 104,535
Deferred policy acquisition costs (8,647) 2,616 3,412
Deferred income taxes 52,845 34,298 29,963
Investment in subsidiaries 6,499 1,487 675
Other 1,526 1,033 471
-------- -------- --------
PMI statutory net income $202,584 $172,470 $139,056
======== ======== ========
Under statutory accounting practices, mortgage insurers are required to
establish each year a contingency reserve equal to 50% of premiums earned in
such year. Such amount must be maintained in the contingency reserve for 10
years after which time it is released to unassigned surplus. Prior to 10 years,
the contingency reserve may be reduced with regulatory approval to the extent
that losses in any calendar year exceed 35% of earned premiums for such year.
Under GAAP, the contingency reserve is not required.
Under statutory accounting practices, insurance policy acquisition costs are
charged against operations in the year incurred. Under GAAP, these costs are
deferred and amortized as the related premiums are earned.
Statutory financial statements only include a provision for current income taxes
due, and purchases of tax and loss bonds are accounted for as investments. GAAP
financial statements provide for deferred income taxes, and purchases of tax and
loss bonds are recorded as payments of current income taxes.
Under statutory accounting practices, certain assets, designated as nonadmitted
assets, are charged directly against statutory surplus. Such assets are
reflected on the GAAP financial statements.
Fixed-income investments classified as available for sale are carried at market
value under GAAP and are generally reported at amortized cost for statutory
purposes.
PAGE 58 THE PMI GROUP, INC. AND SUBSIDIARIES
NOTE 13. BUSINESS SEGMENTS
The Company's two business segments are mortgage insurance ("MI"), including
ancillary services, and title insurance ("Title"). Following is segment
information as of and for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
1996 1995 1994
---- ---- ----
MI Title Total MI Title Total MI Title Total
--------- ---------- ---------- --------- ---------- ---------- ---------- --------- ----------
Revenues $ 447,051 $54,373 $501,424 $363,718 $41,322 $405,040 $ 313,704 $46,281 $359,985
Income from operations
before taxes 217,511 4,595 222,106 177,641 2,900 180,541 134,993 3,558 138,551
Net income 154,914 3,004 157,918 133,196 2,035 135,231 103,819 2,313 106,132
Depreciation expense 4,467 801 5,268 5,151 875 6,026 4,784 694 5,478
Capital expenditures 9,710 503 10,213 5,833 535 6,368 7,683 1,040 8,723
Assets 1,476,511 33,408 1,509,919 1,274,386 30,054 1,304,440 1,070,072 27,349 1,097,421
NOTE 14. CAPITAL SUPPORT AGREEMENTS
PMI's claims-paying ratings from certain national rating agencies have, in the
past, been based in significant part on various capital support commitments from
Allstate and Sears ("Allstate Support Agreements"). On October 27, 1994, the
Allstate Support Agreements were terminated with respect to policies issued
after October 27, 1994, but continue in modified form (as so modified, the
"Runoff Support Agreement") for policies written prior to such termination.
Under the terms of the Runoff Support Agreement, Allstate may, at its option,
either directly pay or cause to be paid, claims relating to policies written
during the terms of the respective Allstate Support Agreements if PMI fails to
pay such claims or, in lieu thereof, make contributions directly to PMI or TPG.
In the event any amounts were so paid or contributed (which possibility
management believes is remote), Allstate would receive subordinated debt or
preferred stock of PMI or TPG in return.
The Runoff Support Agreement contains certain covenants, including covenants
that (i) PMI will write no new business after its risk-to-capital ratio equals
or exceeds 23 to 1; (ii) PMI will pay no dividends if, after the payment of any
such dividend, PMI's risk-to-capital ratio would equal or exceed 23 to 1; and
(iii) on the date that any of the following events occur: (A) PMI's
risk-to-capital ratio exceeds 24.5 to 1, (B) Allstate shall have paid any claims
relating to PMI policies (directly to a policyholder or by paying an amount
equal to such claims to PMI, or to TPG for contribution to PMI pursuant to the
Runoff Support Agreement, (C) any regulatory order is issued restricting or
prohibiting PMI from making full or timely payments under policies, PMI will
transfer substantially all of its assets in excess of $50.0 million to a trust
account established for the payment of claims.
On June 6, 1996, a CMG Capital Support Agreement was executed by PMI and CMIC
whereby both parties agreed to contribute funds, subject to certain limitations,
so as to maintain CMG's risk-to-capital ratio at or below 18.0 to 1. In
addition, the agreement specifies that under certain circumstances, PMI and CMIC
will contribute up to an additional $4.0 million and $4.8 million, respectively,
to CMG, over and above obligations, net of prior contributions, of $13.2 million
and $16.1 million, respectively, previously agreed to in a shareholder agreement
dated September 8, 1994. At December 31, 1996 CMG's risk-to-capital ratio was
13.9 to 1.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1994 THROUGH 1996)
NOTE 15. QUARTERLY RESULTS (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
Revenues $115,906 $96,588 $119,056 $99,698 $127,450 $103,349 $139,012 $105,405
Net income 36,990 29,855 41,220 36,421 41,280 35,115 38,428 33,840
Earnings per Share 1.05 0.85 1.17 1.04 1.18 1.00 1.10 0.96
NOTE 16. SUBSEQUENT EVENT
On February 4, 1997, the Company, through a newly formed trust, privately issued
$100.0 million 8.309% capital securities, Series A. Such securities are
redeemable after February 1, 2007 at a premium and upon occurrence of certain
tax events, and mature on February 1, 2027. The net proceeds, totaling $99.0
million, will be used for general corporate purposes, including common stock
repurchases, acquisitions and additions to the investment portfolio. The capital
securities were issued by PMI Capital I (the "Issuer Trust"). TPG owns all of
the common securities of the Issuer Trust. The sole assets of the Issuer Trust
consist of approximately $103.1 million principle amount of junior subordinated
debentures (the "Debentures") issued by TPG to the Issuer Trust. The Debentures
bear interest at the rate of 8.309% per annum and mature on February 1, 2027.
Distributions on the capital securities occur on February 1 and August 1 of each
year, commencing August 1, 1997. The obligations of the Company under the
Debentures and a related guarantee and expense agreement constitute a full and
unconditional guarantee by the Company of the Issuer Trust's obligations under
the capital securities. The capital securities are subject to mandatory
redemption under certain circumstances. The capital securities will be presented
as a separate line item in the consolidated balance sheets of the Company,
entitled "Company Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest
Debentures of the Company". The Company will record distributions payable on the
capital securities as interest expense in the consolidated statements of
operations.
PAGE 60 THE PMI GROUP, INC. AND SUBSIDIARIES
R E P O R T O F
M A N A G E M E N T
To the Shareholders of The PMI Group, Inc.
The consolidated financial statements of The PMI Group, Inc. and subsidiaries
have been prepared by management and have been audited by the Company's
independent auditors, Deloitte & Touche LLP, whose report appears on this page.
Management is responsible for the consolidated financial statements, which have
been prepared in conformity with generally accepted accounting principles and
include amounts based on management's judgments.
Management is also responsible for maintaining internal control systems designed
to provide reasonable assurance, at appropriate cost, that assets are
safeguarded and that transactions are executed and recorded in accordance with
established policies and procedures. The Company's systems are under continuing
review and are supported by, among other things, business conduct and other
written guidelines, an internal audit function and the selection and training of
qualified personnel.
The Board of Directors, through its Audit Committee, oversees management's
financial reporting responsibilities. The Audit Committee meets regularly with
the independent auditors, representatives of management and the internal
auditors to discuss and make inquiries into their activities. Both the
independent auditors and the internal auditors have free access to the Audit
Committee, with and without management representatives in attendance.
/s/ W. Roger Haughton
W. Roger Haughton
President and Chief Executive Officer
January 22, 1997
/s/ John M. Lorenzen, Jr.
John M. Lorenzen, Jr.
Executive Vice President and Chief Financial Office
January 22, 1997
R E P O R T O F
I N D E P E N D E N T
A U D I T O R S
To the Board Of Directors and Shareholders of The PMI Group, Inc.
We have audited the accompanying consolidated balance sheets of The PMI Group,
Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The PMI Group, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------------
San Francisco, California
January 22, 1997
(February 4, 1997 as to Note 16)
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 61
[Blank page]
[LOGO OF PMI BOARD OF DIRECTORS APPEARS HERE]
EDWARD M. LIDDY
Chairman of the Board
The PMI Group, Inc.
President and Chief Operating Officer
The Allstate Corporation
DONALD C. CLARK
Chairman (retired)
Household International, Inc.
W. ROGER HAUGHTON
President and Chief Executive Officer
The PMI Group, Inc.
WAYNE E. HEDIEN
Chairman (retired)
The Allstate Corporation
KENNETH T. ROSEN
Chairman
The Fisher Center for Real Estate and Urban Economics,
University of California, Berkeley
RICHARD L. THOMAS
Chairman (retired)
First Chicago NBD Corporation
MARY LEE WIDENER
President
Neighborhood Housing Services of America, Inc.
THE PMI GROUP, INC. AND SUBSIDIARIES PAGE 63
OFFICERS
PMI Mortgage Insurance Co.
================================================================================
Home Office Operations
President and Chief Executive Officer
W. Roger Haughton*
Executive Vice Presidents
John M. Loremzen, Jr.* Chief Financial Officer
Claude J. Seaman* Insurance Operations
L. Stephen Smith* Field Operations
Senior Vice Presidents
Victor J. Bacigalupi* General Counsel and
Secretary
Richard D. Bryan* Chief Information Officer
Bradley M. Shuster* Treasurer and
Chief Investment Officer
Vice Presidents
Joanne M. Berkowitz Credit Policy
W. Gene Campion National Underwriting
Henry W. Hansen Actuarial Services
Margaret M. Heater Training and Development
David H. Katkov Marketing
Juliette B. Madison Community Outreach and
Industry Relations
Stanley M. Packura Customer Technology
Lloyd A. Porter Institutional Markets
Kathleen R. Schroeder Claims and
Policy Servicing
William A. Seymore* Controller
Arthur P. Slepian Joint Venture Operations
Harvey W. Stverson Management Information
Systems
James R. Wagner National Accounts
Michael E. Warner CMG Underwriting and
Operations
Phyllis A. Wilson* Deputy General Counsel
and Assistant Secretary
Assistant Vice Presidents
Mark C. Berkowitz* Investor Relations
Charles F. Broom* Human Resources
John S. Wright Actuarial Services
Field Operations Vice Presidents
Eastern Division
Daniel R. Chatman Sales
Kathleen A. Tufts Underwriting
Central Division
John M. Parsley Sales
Janet W. Parker Underwriting
Western Division
Brad H. Seibel Sales
Mark D. Miller Underwriting
Home Office
Steven D. Packard Field Operations
George G. Breed, one of the founding employees of PMI Mortgage Insurance Co.,
retired from the Company as of December 31, 1996. In his position as Senior Vice
President, General Counsel and Secretary, he provided sound legal counsel and
was instrumental in the success of The PMI Group, Inc.'s main subsidiary, PMI
Mortgage Insurance Co. With his retirement from The PMI Group, Inc., he is
wholeheartedly praised and thanked for a job well done, and we extend our best
wishes for success in his future endeavors.
*Holds the same position with The PMI Group, Inc.
American Pioneer Title Insurance
Company
================================================================================
President and Chief Executive Officer
Roy W. Lassiter
Senior Vice Presidents
Barbara L. Allen Marketing
George P. Daniels General Counsel
Stephen T. Rumsey Chief Financial Officer
PAGE 64 THE PMI GROUP,INC AND SUBSIDIARIES
Shareholders' Information
Corporate Headquarters
The PMI Group, Inc.
601 Montgomery Street
San Francisco, CA 94111
(800) 288-1970
Internet: www.pmigroup.com
Annual Meeting
All shareholders are cordially invited to attend the annual meeting of The PMI
Group, Inc.
Tuesday, May 13, 1997
9:00 a.m.
The PMI Group, Inc.
Conference Center, 17th Floor
601 Montgomery Street
San Francisco, CA 94111
Form 10-K and Investor
Inquiries
Shareholders may receive, without charge, a copy of The PMI Group, Inc.'s Form
10-K filed with the Securities and Exchange Commission, for the year ended
December 31, 1996, by contacting:
Investor Relations
The PMI Group, Inc.
601 Montgomery Street
San Francisco, CA 94111
(800) 288-1970
Common Stock and
Dividend Information
1996
- --------------------------------------------------------------------------------
Dividends
Quarter High Low Close Declared
- --------------------------------------------------------------------------------
First 51 3/4 41 1/2 43 5/8 .05
Second 46 1/4 40 42 1/2 .05
Third 54 3/8 39 7/8 53 1/8 .05
Fourth 60 52 1/8 55 3/8 .05
1995
- --------------------------------------------------------------------------------
Dividends
Quarter High Low Close Declared
- --------------------------------------------------------------------------------
First * * * *
Second 45 36 43 3/8 .05
Third 48 1/8 42 1/4 47 3/8 .05
Fourth 53 1/2 40 3/4 45 1/4 .05
* The PMI Group, Inc. common stock began trading on April 11, 1995.
Stock price ranges are from the New York Stock Exchange Composite Listing. At
March 3, 1997, there were approximately 30 shareholders of record and
approximately 8,511 beneficial owners of shares held by brokers and fiduciaries.
Stock Exchange Listing
The PMI Group, Inc. is listed on the New York Stock Exchange and the Pacific
Exchange under the trading symbol PMA.
Quarterly Information
The PMI Group, Inc. does not prepare or distribute a traditional quarterly
report. However, the Company's quarterly earnings press releases and quarterly
fact sheet are available upon request by calling (800) 288-1970 or by visiting
our website. Press releases can be faxed to you. Call (800) 758-5804 and enter
706963.
Transfer Agent/
Shareholder Records
For information regarding individual stock records, dividend checks or stock
certificates, please call (415) 954-9509, or write:
ChaseMellon Shareholder Services
Shareholder Relations
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105
Media Inquiries
Corporate Relations
The PMI Group, Inc.
601 Montgomery Street
San Francisco, CA 94111
(800) 876-4764
[LOGO OF PMI APPEARS HERE]
The PMI Group, Inc.
601 Montgomery Street
San Francisco, CA 94111
(800) 288-1970
The Board of Directors recommends a vote FOR Items 1 and 2. Unless contrary
instructions are given below, this proxy will be voted in accordance with the
recommendations of the Board of Directors.
Please mark your votes
as indicated in
this example [X]
FOR all nominees WITHHOLD AUTHORITY YES NO
listed below for all nominees I PLAN TO ATTEND THIS [_] [_]
listed below MEETING
[_] [_]
FOR AGAINST
ITEM 1-ELECTION OF DIRECTORS ITEM 2-RATIFICATION OF [_] [_]
James C. Castle John D. Roach APPOINTMENT OF
Donald C. Clark Kenneth T. Rosen INDEPENDENT ABSTAIN
W. Roger Haughton Richard L. Thomas AUDITORS [_]
Wayne E. Hedien Mary Lee Widener
Edward M. Liddy
INSTRUCTION: To withhold authority to vote for
any individual nominee, write the nominee's
name in the space provided below
- ---------------------------------------------
Signature Signature Date
----------------------------- ----------------- -----------
Note: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
ANNUAL MEETING OF SHAREHOLDERS
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO
ATTEND THE ANNUAL MEETING OF THE PMI
GROUP, INC.: TUESDAY, MAY 13, 1997
9:00 A.M.
THE PMI GROUP, INC.
CONFERENCE CENTER, 17TH FLOOR
601 MONTGOMERY STREET
SAN FRANCISCO, CA 94111
WHETHER OR NOT YOU EXPECT TO ATTEND, TO ENSURE YOUR REPRESENTATION AT THE
MEETING AND THE PRESENCE OF A QUORUM, PLEASE COMPLETE, DATE, SIGN AND MAIL THE
ATTACHED PROXY CARD PROMPTLY.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THE PMI GROUP, INC.
The undersigned hereby appoints W. Roger Haughton, Victor J. Bacigalupi
and L. Stephen Smith proxies, with power to act without the other and with power
of substitution, and hereby authorizes them to represent and vote all the shares
of Common Stock of The PMI Group, Inc. standing in the name of the undersigned
with all powers which the undersigned would possess if present at the Annual
Meeting of Shareholders of The PMI Group, Inc. to be held May 13, 1997 or any
adjournment thereof as designated on the other side, and upon any and all such
other matters as may properly come before the meeting.
(Continued, and to be marked, dated and signed, on the other side)
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE